Deciding when to take social security is a decision that will last retirees’ lifetimes. Many people don’t realize the implications of taking social security at different ages. It’s not as straight forward a decision as one might think. Social security payments last a lifetime, and that makes them pretty darned important. According to the Social Security Administration about one out of four 65 years-old today will live past 90 and one out of ten will live past 95.
When to take social security benefits depends on how you answer the question, “Do you want to maximize payments or maximize income?”
For those who want to maximize the number of payments they receive in their lifetime, earlier payments trump waiting. Jason F. Branning, CFP states, “A “maximizing payment” perspective will likely prove the best solution if one is terminally ill, or if you have no other income due to your inability to work. No one can predict the best time to take Social Security, because predicting the date of an individual’s death is impossible.”
“If your goal is focused on sustaining your unknown lifespan in retirement ‘maximizing income’ is a logical solution.” The greater the portion of monthly expenses that are paid for with inflation-adjusted social security payments, the less needs to be withdrawn from IRAs and other investments. Receiving larger monthly checks by waiting to begin benefits may work best.
Social Security retirement ages
A key to deciding when to take social security is your Social Security full retirement age (FRA). Once upon a time early retirement was at age 62 and full retirement age was 65 for everyone. This is still true for those born in 1937 or earlier. For those born 1938 or later, the early retirement age remains at 62, but the full retirement age increases gradually from 65 to 67. Everyone has the option to hold off applying for social security benefits until age 70. Find your full retirement age by using this Social Security-Retirement Age Calculator.
You may start taking social security benefits at various ages; however, this does not mean you have to be ‘retired’ from a regular job. Once you are at your full retirement age your earnings will not impact social security benefits.
Prior to your full retirement age benefits may be decreased $1 for every $2 earned over the annual limit.
Example from SSA.GOV
You begin receiving your Social Security benefits at age 62 in January 2013. At age 62, you are entitled to $800 a month in benefits ($9,600 for the year).
You work and earn $23,120 ($8,000 over the $15,120 limit) in 2013. Your Social Security benefits would be reduced by $4,000 ($1 for every $2 you earned over the limit), but you would still receive $5,600 of your $9600 in benefits for 2013. ($9,600 – $4,000 = $5,600). When you reach your “full retirement age” your monthly Social Security benefit will be recalculated to take the early retirement earnings into consideration.
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Benefits at Different Ages
If you take early retirement at age 62 your monthly benefit will be permanently reduced. Waiting until your full retirement age will increase your check to the full benefit. As you postpone the start of social security benefits, you increase the amount of your monthly benefit.
Let’s look at an example: full retirement age vs. early retirement age
Roberta was born in 1951. She will reach her full retirement age when she’s 66 years old. Her full retirement income will be $1,000 per month. If she takes early retirement benefits at age 62, her monthly check would be $750, a 25 percent reduction. By postponing social security to age 70 she would garner a monthly check of $1,320. The benefit amount at age 70 in this example is 32 percent more than she would receive per month if she chose to start getting benefits at full retirement age.
See this article, “When To Start Receiving Retirement Benefits” by the Social Security Administration for additional information.
Break-Even Calculations
To help determine the best age to start social security benefits, a tool often used is a break-even analysis. The break-even calculation compares two or more options for claiming benefits. Break-even occurs at the age when the total Social Security income from two options is the same. In Roberta’s example, that occurs the month before her 78th birthday, when both options total $144,000. If she expects to live beyond the age of 77, she would benefit from taking social security at her full retirement age so she could collect higher monthly income for the rest of her life.
The Basic Break-even comparison does not grow monthly benefits by expected inflation, consider taxes on benefits, or add investment returns if the payments will be invested.
Did you know an ex-spouse may still prove valuable?
If you were married to a divorced spouse for at least 10 years you may be eligible to receive benefits on your former spouse’s Social Security record. If you married again before you turned 60 and are still married, that probably eliminated this possibility. Benefits paid to a divorced spouse or a surviving divorced spouse will not affect the benefit amount paid to other family members who receive benefits on the same record. The Social Security Administration can estimate benefits on your record and on your divorced spouse’s record so you can select the higher amount.
Is Social Security here for our lifetime?
Each year the Social Security Board of Trustees publishes a report on the financial strength of Social Security and Medicare. Social Security is made up of two arms, retirement (Old Age Survivor Insurance, OASI) and its disability program (Disability Insurance, DI). The Trustee’s report states, “The ‘combined’ OASDI trust funds have a projected depletion date of 2033…. After the depletion of reserves, continuing tax income would be sufficient to pay 77 percent of scheduled benefits in 2033 and 72 percent in 2087.”
Image courtesy of Stuart Miles/FreeDigitalPhotos.net
The Trustees point out “legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare.”
The decision to start taking social security benefits may impact the allocation of your investment portfolio. Prior to applying for benefits is the best time to talk with your investment advisor.
This article mentions only a few nuances regarding the start date for taking social security benefits. The rules are more complex than most realize. Do your homework before making a final decision. What you don’t know may hurt you financially for the rest of your life.
If you would like a one-on-one consultation regarding your social security benefits, please contact us to schedule a review. Making an informed decision on when to take social security can add several thousand dollars to your lifetime income.
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