Pros and Cons of Taking Early Social Security

early social security

You can begin taking early social security payments as young as age 62. Most people start taking it around age 66. Some people believe that you should wait until age 70 if you’re in a position to do so. What’s the right answer? It’s hard to say. There are some big pros and cons to taking that money early. Understanding those can help you make the right decision for your own retirement.

What Happens When You Take Early Social Security?

Generally speaking, you’re able to get your “full retirement” when you reach around age 66. (This varies slightly depending on individual circumstances.) If you take that money early, then you don’t get the full amount. Therefore, your monthly Social Security payments are lower than they would be if you waited.

On the other hand, you start to receive that money sooner. If you reach age 62 and really need that Social Security income, then you might find that it’s worth it to take the lower monthly amount. You’ll start getting that monthly check years before you would if you waited until reaching full retirement age.

So, in terms of the most basic pros and cons, taking your money earlier means:

  • The benefit is that you start receiving your money sooner.
  • The drawback is that you get less money per month throughout your retirement.

Social Security May Change in 2035

The Motley Fool makes a great case for taking early Social Security, which is that big changes may await when it comes to social security. In fact, Congress may cut benefits by 23% for all people receiving social security from that point forward. Therefore, if you’re thinking about retiring between now and then, it might be worth it to take the money early.

Yes, you’ll get less per month when you do that. However, you’ll earn the full “lesser” amount every year up until 2035. The longer you wait to start taking payments, the less time you have to accrue money before that potentially huge Social Security cut.

Of course, we don’t actually know for sure what decision Congress will make. There’s a chance that they won’t make that cut. Or it might not be as big. Therefore, taking early Social Security is a risk. You may opt for the lesser monthly amount now, hoping to accrue more before the big cut, only to find out that the big cut doesn’t happen. You’ll still get the lesser monthly amount. It’s not like you can go backwards in time and “take back” your decision to take early Social Security.

So, taking the money early means:

  • You might get more money overall by cashing out as early as possible before a big cut.
  • If the big cut doesn’t happen, then you might not have made as much as you potentially could have.

We Don’t Know How Long We Will Live

If you had a crystal ball then it might be easier to decide when to take your money. If at age 62 you knew that you only had ten years left to live, then obviously you would take early Social Security. On the other hand, if you knew that you were going to live another thirty years, then you might opt to keep on working until you could completely max out that retirement income.

Unfortunately, there’s no way to know. So the pros and cons really depend on factors that we can’t entirely know or control. All that you can do is make the best decision possible with the information that you have as you reach retirement age. Consider your health and likely longevity based on family history and other factors. Think about how much money you’ll likely get if you take early Social Security vs. the full amount. Weigh what would happen if Congress cut that amount in 2035. Then do your best to decide how the pros and cons balance out.

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5 Financial Downsides to Retirement

retirement

Retirement sounds terrific. You finally get to take a break. You’ve worked all of your life for this. However, is it really all that it’s cracked up to be? There are many downsides to retirement that people don’t always talk about. In fact, there are some big financial downsides to retirement. It’s important to be aware of those before you retire. Here are the five biggest retirement problems:

1. Inflation Keeps Rising

The number one financial problem that people face in retirement is inflation. The cost of living just keeps going up. It doesn’t matter to the world that you’re getting older and living on what may be a fixed income. The price of milk and utilities will just keep increasing.

LIMRA reports that retirees suffer from the effects of inflation even when inflation rates are relatively low. They demonstrate that just a 2% annual inflation rate could cause the average retiree to lose nearly $74,000 within a 20-year retirement period. If you haven’t accounted for inflation when planning for retirement then you could end up financial trouble.

2. Retirees Pay a Lot in Taxes

Many people assume that they’re taxes will go down in retirement. After all, you’re not working as much, so you’re not going to earn as much, right? Wrong. Many people actually earn as much or more after retiring, especially if they planned ahead financially for secure retirement.

Unfortunately, that means that you have to keep paying taxes. You don’t have an employer taking those taxes directly out of your paycheck anymore. Therefore, you’re going to have to deal with that yourself. Moreover, remember that your 401(k) money, which wasn’t taxed when you set aside, is taxable income when you use it in retirement.

3. You Have to Make the Money Last

Here’s the obvious but important thing about retirement: you’re spending money and not earning any. Ideally, you’ve created some kind of passive income to help you bring some money in during retirement. Mostly, though, people retire and use what they have in savings. People are living longer and longer after retiring. The longer you live, the more you have to make that money stretch. Therefore, you might want to think twice about retiring early.

4. Old Age Is Expensive

Not only do you have to make your money last. Not only do you have to consider the problem of inflation. But you have to think really seriously about what life is going to cost you after retirement, particularly as you get older and older. So many costs go up as you age. Your healthcare needs rise. You may begin to need help through in-home care or assisted living.

These costs are not cheap. MSN News reports that an average 65-year old couple requires more than one quarter of a million dollars for healthcare costs alone. A private nursing home costs more than $100,000 per year. When you’re young, you really can’t fully imagine just how expensive it is to get old. Once you’re in retirement those costs can become a very harsh reality.

5. You May Have To Keep On Working

Social security alone isn’t likely to support you. Your own savings and investments might not be enough to cover these costs. Therefore, you may have to keep on working. I personally know many people who retired from their long-term full-time jobs only to have to secure new employment a few years after retirement. Therefore, retirement may simply not be what you expect.

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Want to Become a 401(K) Millionaire? More and More People Are Doing It.

401(K) Millionaire

Becoming a 401(K) millionaire is possible. It’s not necessarily easy. However, more and more people are succeeding.

What is a 401(K) Millionaire?

If you’ve never heard of the time before then you might wonder exactly what it means to be a 401(K) millionaire. It isn’t complicated. In fact, it’s exactly as the name suggests. A 401(K) millionaire is someone who has at least $1 million in their retirement account.

The Number of 401(K) Millionaires Is on the Rise

According to CNBC, the number of 401(K) millionaires increased by 35% in the first quarter of 2019 (as compared to the previous year). The main reason for this is because of the large number of baby boomers who are hitting that seven figure mark. The average 401(K) millionaire is 60 years old.

How to Become a 401(K) Millionaire

If you want to become a 401(K) millionaire then you have to get a grip on your money immediately. The younger you are when you start setting that money aside, the more likely it is you’ll reach that seven figure retirement target. That said, here are some key tips that anyone can use to increase their 401(k) savings.

Max Out Your Contributions

The most important thing that you can do is to contribute as much as you’re allowed to contribute to your 401(k). Your allowed employee contribution amount changes from year to year. In 2019, you can contribute $19,000.

However, if you’re over the age of 50, then you’re allowed to contribute a little bit more so that you can “catch up.” In 2019, you’re allowed to contribute $6000 extra.

Remember that the numbers tend to increase every year so always check what the latest possibilities are.

Moreover, make sure that you’re maximizing employer contributions. Take advantage of any options you have at work for your employer to contribute up to the maximum amount. In 2019, the maximum employer contribution is $37,000. Go talk to HR today.

Make Smart Investments

When investing your money, it’s important to consider your age and how long it will be before you retire. If you’re young, then invest in equity-based mutual funds. They offer higher risk but bigger reward. Hang on through the ups and downs.

However, as you get older and approach retirement age, it’s time to switch to more conservative investments. That’s when you want to put more money into cash and bonds.

One smart option is to invest your 401(k) money into a target-date fund. You set the target retirement date. Then professionals manage your investments for you with that goal in mind. They’ll follow the same rules as above (riskier investments early on and more conservative ones later) so that you don’t have to worry about the details so much.

Don’t Count Yourself Out

You don’t have to be rich in order to become a 401(K) millionaire. Although it’s best if you start young, don’t count yourself out if you’re older. Even if you don’t reach that seven figure target, aiming to do so can help you maximize your retirement income.

Know What You Need to Save To Become a Retired Millionaire

Use a millionaire calculator in order to get a realistic picture of what it would take for you to have $1 million or more at retirement. You’ll enter:

  • Current age
  • Target retirement age
  • Amount currently invested
  • Savings per month
  • Expected rate of return
  • Expected inflation rate

This gives you your expected savings at retirement. However, you can play around with the “savings per month” number until your expected savings reaches $1 million. Then you know how much you need to save to reach that million mark. While this doesn’t specifically determine your 401(k) amount, it gives you a good idea of how much other savings you’ll have to add to your 401(k) to become a millionaire at retirement.

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