Is 65 a Good Age to File for Social Security?. Currently, American workers can claim Social Security retirement benefits at any point during an eight-year window starting at age 62 and ending at age 70, the latest age at which you'll get an incentive for delaying benefits. When most people contemplate when to take benefits, they're typically choosing between filing as early as possible (at 62), filing at their FRA, or delaying past their FRA to get a boost in benefits. Reasons to claim Social Security at 65 Claiming Social Security at 65 can be a smart idea under certain circumstances. Specifically, you'll lose 6.67% for each year you're ahead of schedule for up to three years, and then 5% of your benefits for each year beyond that. However, while filing for Social Security at 65 will cut your benefits, you won't face nearly as steep a reduction as you would by filing at 62. Reasons not to claim Social Security at 65 Of course, claiming Social Security at 65 isn't the right move for everyone. If you're looking at a less-than-impressive IRA or 401(k) balance, or you don't have another source of retirement income other than Social Security, then it pays to wait at least until you reach FRA, if not longer, to claim benefits, provided you're able to keep working until that time. While you can work and collect Social Security simultaneously, you'll lose a portion of those benefits if you file at 65, because at that point you won't have reached your FRA. Furthermore, if you're turning 66 this year, you can earn up to $44,880 without losing a portion of your benefits, and you'll give up just $1 for every $3 of earnings above that threshold.
“The young man knows the rules, but the old man knows the exceptions.”
— Oliver Wendell Holmes Sr.
In finance as in life, depending too rigidly on rules without considering their shortcomings and exceptions can be dangerous. The famous “4% rule” for the withdrawal of funds from a nest egg during retirement is a perfect example.
The 4% rule is very simple and handy, but it won’t work for everyone in every situation. Let’s take a closer look at some of its key problems.
Meet the 4% rule
The 4% rule, introduced by financial advisor Bill Bengen in 1994 and later made famous in a study by several professors at Trinity University, says that you can withdraw 4% of your nest egg in your first year of retirement, adjusting future withdrawals for inflation. It assumes a portfolio that’s 60% in stocks and 40% in bonds, and it’s designed to make your money last through 30 years of retirement.
That all sounds pretty good, right? Let’s run through an example. Imagine you’ve saved $400,000 by the time you retire. In your first year of retirement, you withdraw 4%, or $16,000. In year two and every following year, you’ll need to adjust that withdrawal rate for inflation. Let’s say inflation over the past year was at its long-term historic rate of 3%. If so, you’ll multiply your $16,000 withdrawal by 1.03 and you’ll get your second year’s withdrawal amount: $16,480. The following year, if inflation is still around 3%, you’ll multiply that by 1.03 and get a withdrawal amount of $16,974. See? Pretty easy.
The advantages of the 4% rule
The upside of the 4% rule is clear: It makes it easy to figure out how much you can safely withdraw from your retirement nest egg each year, while making that nest egg last a long time. After all, one of the biggest retirement fears people have is running out of money.
If you flip it around, the 4% rule can also help you determine how much you’ll need to accumulate in the first place. You first have to know how much annual income you’ll want in retirement, though. Let’s say, for example, that you’d like total income of $60,000, and you expect to collect $25,000 from Social Security. That leaves $35,000 in income you’ll need to generate on your own. It would be your first year’s withdrawal. So if you assume that $35,000 is 4% of your nest egg, then you can multiply $35,000 by 25 to arrive at how big the nest egg will need to be: $875,000. (Why 25? Because 1 divided by 0.04 is 25.)
Here’s a look at the initial-year withdrawals that come with various nest eggs, going by the 4% rule:
4% First-Year Withdrawal
Serious problems with the 4% rule
Of course, the 4% rule isn’t as perfect and simple as that, as Oliver Wendell Holmes Sr., reminded us. Here are three problems with it.
It’s based on certain assumptions: Remember that the 4% rule wasn’t created to work perfectly in every situation and that it’s the product of certain assumptions. For starters, it aims to make your money last for 30 years, but if you retire at 60 and live to 97, your nest egg will need to support you for 37 years. It also uses a portfolio…