The increase in Social Security’s full retirement age highlights the importance of strategic planning for those approaching retirement.
For many Americans, the notion of retirement is closely tied to reaching a specific age, traditionally 65. However, with gradual adjustments in the full retirement age (FRA) for Social Security benefits, those born in 1959 will start to see these changes manifest in 2025. At that time, their FRA will be 66 years and 10 months, reflecting the culmination of a gradual shift implemented over decades.
Understanding how these changes impact retirement plans is essential for maximizing Social Security benefits. The 1983 Social Security Amendments set forth a plan to incrementally increase the FRA from 65 to 67. As part of this implementation, individuals born in 1959 will need to wait until they are 66 years and 10 months to reach their full retirement age. Meanwhile, those born in 1960 or later will see an FRA of 67. As a result, people anticipating a retirement age of 66 years and 8 months—such as those born in 1958—will now need to delay their plans by an additional two months.
For those considering early retirement, choosing to collect benefits at age 62 leads to a considerable monthly benefit reduction—29% for the 1959 cohort, increasing to 30% for those born in 1960 or later. On the flip side, delaying benefits beyond the FRA can lead to an annual increase of up to 8%, reaching a total enhancement of 32% if benefits are postponed until age 70.
Individuals who wish to retire before reaching their FRA can adopt several strategies to bridge the gap without the need for full-time work. These include negotiating a phased retirement, where a three- or four-day workweek can aid in covering essential costs without eroding retirement savings. Maintaining a financial cushion through a high-yield savings or money-market account with 18-24 months’ worth of living expenses can also provide stability during this period.
Additional income can be generated by monetizing unused space in the home or driveway, such as through long-term room rentals, which can yield $700–$1,000 monthly, or driveway parking for urban dwellers, which can earn between $150 and $300. Alternatively, part-time positions at national retailers like Costco, Home Depot, and Trader Joe’s come with medical benefits and can offer both income and health insurance while awaiting full retirement benefits.
For early retirees, applying tax-smart strategies can prove beneficial. Withdrawing from taxable brokerage accounts first is advised to avoid penalties and to allow retirement accounts like IRAs or 401(k)s to continue accruing value. Additionally, Roth IRA contributions (excluding earnings) can be withdrawn at any age without facing taxes or penalties.
Maintaining a low Modified Adjusted Gross Income can help individuals qualify for subsidies under the Affordable Care Act, offering significant savings on health insurance premiums until age 65, when Medicare eligibility begins. Side income from activities such as online tutoring, pet sitting, or crafting can further supplement retirement income without the need for a full-time commitment.
As discussions among lawmakers continue regarding potential further increases to the FRA to ages 68 or 69, it is imperative to anticipate these possibilities with a flexible retirement plan. Building a cash reserve, securing part-time income opportunities, and employing tax-efficient withdrawal strategies will offer a buffer against potential future changes in the Social Security system.
While the change in the retirement age from 65 to 67 is nearly complete, careful planning remains crucial amidst the complexities of modern retirement. Even though the increase in the retirement age might seem minor, establishing a robust retirement plan can help ensure that retirement is a personal choice rather than a requirement defined by Social Security.
Source: Original article