When do you want to begin receiving Social Security? All too often the answer is as soon as possible and not at your full retirement age or later. Social Security is just one tool of your retirement income strategy. You need to analyze the benefit options and determine how they best work with your other retirement assets. The differences will have financial repercussions that you (and your spouse) will have to live with for 20+ years.
Full retirement age
If you work for more than ten years, then you qualify for Social Security benefits. The benefit is calculated through a formula based on your highest 35 years of earnings, or however many years you did work if it was less than 35.
This calculation is the amount you will receive at Full Retirement Age (FRA). Your FRA depends on when you were born.
Between 1943 – 1954: Your FRA is age 66
1955: 66 & 2 mo
1956: 66 & 4 mo
1957: 66 & 6 mo
1958: 66 & 8 mo
1959: 66 & 10 mo
Your full retirement age is the benchmark. Begin Social Security before your FRA and you’ll receive a reduced benefit. On the other hand, delay Social Security beyond your FRA and the benefit increases.
Over two-thirds of eligible people take Social Security at age 62
Most people want to take the money and run. They figure they’ve been paying into the program for years, and want their money before either they or Social Security goes belly up!
Social Security is not going away. If Congress would stop kicking the can down the road and implement a few changes, there wouldn’t be any concern for Social Security. Eventually, that will happen, and when it does, it most likely will affect millennials – they are the furthest away from getting Social Security.
On the other hand, you will be going belly up someday. That is one of the conundrums of deciding when to take Social Security. The health of you, and your spouse, if you have one, must be taken into consideration.
Social Security is a retirement income strategy
Think of Social Security as an annuity. As long as you’re alive, you’ll receive a monthly income. Save for the occasional cost-of-living increases, once you start Social Security, that is the amount you will be getting for the rest of your life.
However, there is a one-time do-over. If you change your mind, and it’s within one year of starting benefits, you can cancel. First, you’ll need to return all the money you’ve received, AND if anyone receives Social Security based on your work record, then that person will need to consent to this reversal.
That, of course, is not very attractive. Shoot for getting it right the first time. Unfortunately, there’s no one right age for everyone. Whether you want to take Social Security early, at full retirement age or delay until age 70, there are pros and cons to each.
Reasons to take Social Security before full retirement age
Poor health/family history of a short life span: Smoke 4 packs a day and visit your local fast food joint regularly, my advice is to take Social Security at age 62. It may sound like I’m joking, but I’m not. The reality is, if you believe the cards are stacked against you living into your late seventies, you’re probably better off filing for Social Security at age 62.
Unemployed: Retirement is sometimes not your decision. If you’re 62, lost your job, and have little in retirement savings, you may have no choice but to begin Social Security. You can receive Social Security and collect unemployment at the same time. Social Security is not affected, BUT it is possible you could see a reduction in unemployment benefits. Each state treats Social Security income differently, so check with your state to find out how it affects unemployment benefits.
Retirement accounts have either small balances or have taken a recent hit: You need to live, and sometimes based on your retirement account balances, it’s just not feasible to delay Social Security. If you haven’t saved enough, you may have no choice.
If there’s a market drop, like in 2008: Many people shouldn’t take distributions after a steep decline in their account values. Another option is to take Social Security to give your accounts time to recover. This strategy, of course, depends on your needs and retirement balances.
You have young children: If you qualify for Social Security, dependent children may be eligible for benefits. Each child who is unmarried and under 18, or up to age 19 if a full-time secondary school student, is eligible to receive a monthly payment up to one-half of your full retirement benefit amount. Limits do apply. Many people are unaware of this benefit.
Reasons to delay Social Security
You still have earned income: When you file for Social Security before your full retirement age, and your earnings are above certain limits, part of your benefit is withheld (temporarily). If you begin receiving benefits at age 62, for every two dollars of earned income above the annual limit, your Social Security benefits will be reduced by one dollar. During the year in which you reach your full retirement age, the reduction is one dollar for every three dollars earned above the limit. The reduction is eliminated for years following your full retirement age.
Don’t be alarmed; the withholding is temporary. Once you reach your FRA, your benefit is recalculated so you can recover the Social Security income that had been withheld.
You have significant retirement savings: It may make sense to delay Social Security and instead take distributions from an IRA/401(k). This accomplishes two things, first, by delaying Social Security you’re increasing the benefit down the road, and secondly, you may be reducing future required minimum distributions when you reach 70.5.
Good strong stock: If you’re healthy and have a family history of a long lifespan, the total amount you receive from Social Security could be significantly higher (see below). The longer you live, the more Social Security you’ll receive.
Guaranteed annual increase of 8% annually: Who can beat that? By waiting to full retirement age, or even age 70, your monthly benefit will increase 8% annually. How much of a difference does that make? Take a look at page 2 of your Social Security statement. You can access it here. The monthly benefit amounts of taking Social Security at your FRA, age 70, and age 62 are spelled out.
The break-even point
Everyone wants to know the break even point for delaying Social Security. How old will you be when the total value of a higher monthly benefit from delaying Social Security exceeds the total amount of lower benefits from taking Social Security early.
In general, if you delay benefits to age 66, the break-even point is around age 78. If you delay to age 70, the break-even point is approximately age 80. Are those chances you want to take? If you expect to live beyond those years, it most definitely would be financially worth your while to delay Social Security.
The marriage factor
Marriage is a major factor when considering Social Security. That’s because Social Security has a survivor benefit. That means the surviving spouse will receive either their own Social Security benefit or their spouse’s, whichever is higher.
Because women on average live longer than men, married women are perfect candidates for claiming benefits before full retirement age. However, this only works if the husband does not claim his benefits early. By not claiming early benefits, the husband increases the monthly benefit his wife eventually receives upon his death.
For same-sex couples or couples where one spouse has a larger benefit than the other, it may be a good idea to have the spouse with the smaller benefit file early, and the spouse with the greater benefit delay until FRA or later. Other factors such as health, age difference, and benefit amounts also must be considered.
What’s right for you?
Obviously, there is no rule of thumb, and it’s not as clear-cut as many believe. Understanding all of these factors and determining their impact on your Social Security benefit is imperative. The analysis is the key.
If you need assistance determining the most beneficial strategy for Social Security, please get in touch and we can weigh the different options.