Most people in the neighborhood of retirement age will remember the classic by Bob Dylan, The Times They are A-Changin’. He wrote this song in a time of cultural revolution and political unrest, as a symbol of a world that would never be the same. This classic still rings true, regardless of your age, and especially when it comes to Social Security benefits.
The older you get, the more the age 65 seems to have a certain magic to it. That’s the year when you trade the alarm clock on your nightstand for your favorite book. That’s the year the hectic commute downtown becomes the stroll to the golf course. These things are still true...almost.
The biggest change is that the retirement age has been incrementally increasing from the iconic 65 to 66 over the last decade or so. The official age will reach 67 by 2022. While the change is a matter of just a few years, what matters is how this will affect you.
But First, a Little History
Social Security was first put in place by the Social Security Act of 1935. At the time, many state pension systems and others used 65 as the benchmark age for beginning retirement. This was adopted by the Social Security administration, and the age of 65 became the cultural marker that it is today for punching out that one last time.
Come 1983, and the seemingly endless supply of Social Security funding looked like it might go broke entirely. It was then that Congress passed the Social Security Amendments Act of 1983, as an effort to help the program survive. Among other measures, this Act started the change of the retirement age to 67, which would happen incrementally over the next few decades. We are nearing the end of this process, which will put the retirement age at “three score and seven” in a matter of a few years.
But How Does This Affect Me?
For many years now, with a retirement age of 66, the golden formula for Social Security used to involve the choice between 62 and 70. You could retire early at 62, and take a penalty for it, namely 25 percent of your check per month. On the other hand, you could hold out until your 70th and get a bump – 32 percent extra added to your check per month.
The current retirement age, as we stand with Social Security in 2018, is 66 years and four months old. This is two months up from last year, which was the first change in retirement age since 2005. A seemingly minor change that skews the numbers slightly.
For a few generations, you used to have your benefits raised 8 percent a year that you worked after your 65th. This would max out at a 40 percent increase when you hit 70 years old. Although the mathematical picture is the same now, the frame has shifted. With a retirement age of 67 (in 2022), you only have three years until the cut off at 70 – so you end up with 24 percent instead of 40 percent.
Because this is an incremental change, with Social Security 2018, the retirement age is 66 and 4 months. This leaves 3 years and 8 months to raise the percentage before the cut off at 70 – not the full four years. So instead of a 32 percent increase, those waiting for 70 are looking at a 29.3 percent increase. As the retirement age raises, the financial “gravy gap” between retirement and 70 will get smaller.
The Value of Waiting
Michael Kitces reminds us that “... it’s important to recognize that while the increase in full retirement age makes the adverse consequences of starting at age 62 a little more severe (for retirement and spousal benefits) and the upside of waiting until age 70 less advantageous (for retirement benefits), it doesn’t materially change the relative value of waiting.” Meaning that there is still an advantage to waiting with Social Security in 2018, even if the pennies are being shaved away from it slowly.
However the numbers shake out, we all need to be prepared for a reduced Social Security benefit compared to years past. The well isn’t run dry, but it is running lower than it was in previous generations, and a clear and careful plan is the best preparation for that reality.
At Atlas Wealth Advisors, our passion is to break down complex issues like Social Security into simplified action plans that you can easily understand and follow. A financial advisor can help you to keep up with the financial times, even when they’re a-changin.’