Weighing Your Options on When to Take Social Security
Crystal Cox, MBA, CDFA®, CFP®
Senior Vice President at Wealthspire Advisors
By Crystal Wipperfurth, MBA, CRPC®, CFP®, Wealth Advisor
Determining when to start collecting your Social Security benefit is an important financial decision that requires careful consideration of many factors. While many people don’t anticipate taking benefits before full retirement age, certain life events may force them to do so. A Transamerica Center for Retirement Research survey found that more than half of retirees (56 percent) retired sooner than they had planned.
When can you take Social Security?
“Full retirement age” as specified by the Social Security Agency (SSA) depends on your birth year. A table can be found here. While there’s no universally “correct” age to begin claiming benefits, those who can afford to wait may find it beneficial to do so because benefits increase about 8 percent per year for every year they are delayed.
The earliest you can claim benefits is at age 62, but if you elect to start your benefits early, they will be reduced depending on the number of months you receive benefits before you reach your full retirement age. If your full retirement age is 66, the reduction of your benefits at age 62 is 25 percent; at age 63, 20 percent; at age 64, 13.3 percent; and at age 65, it is 6.7 percent. If your full retirement age is older than 66 (born after 1954), the reduction in your benefit amount will be greater, up to a maximum of 30 percent at age 62 for people born in 1960 and later. SSA provides a comprehensive chart on benefit reductions here.
Your benefit stops increasing at age 70 – so it’s not beneficial to continue delaying past this point.
Considerations in deciding when to take benefits
Although delaying can accrue a monetary benefit, it may not be the right strategy for everyone. Personal and psychological factors beyond the numbers need to be factored into your decision. Some considerations that need to be factored into any decision on when to claim Social Security:
Life expectancy: Individuals with below average life expectancy may not want to delay taking Social Security and instead take what they can while they can. Healthy individuals with family histories of longevity might consider delaying in order to end up with a higher monthly check. SSA has a handy life expectancy calculator that may assist in base-level calculations, though it doesn’t factor in family or individual health histories.
Asset level: Those with enough assets to fund early years of retirement without relying on Social Security checks might find it beneficial to delay. And those who need (or want) to continue working should avoid claiming Social Security before full retirement age, as claiming while earning W2 wages reduces benefit amounts. Or, consider going down to part time.
According to the SSA, the time you will reach full retirement age affects earned income limits and how much benefits are reduced. Prior to reaching full retirement age, the earning limit is $17,640 in 2019. After that, $1 will be deducted from the benefit for every $2 that exceeds the limit. The year you reach your full retirement age, the earnings limit increases (to $46,920 in 2019) and the benefit deduction decreases to $1 for every $3 earned over the limit. If you retire in the middle of the year and begin your Social Security benefits, you will not be penalized based on what you earned in the early months of the year, as the SSA considers your earnings on a monthly basis the year you retire. Once an earner hits full retirement age, no benefits will be withheld for continuing to work.
Estate planning: Social Security benefits cannot be inherited, so if you’d like to factor your benefits into the legacy you wish to leave for your children, it might be best to take benefits early so you can allow investments to grow.
Spousal benefit strategy: Spouses can claim a Social Security benefit based on their own earnings record or collect a spousal benefit that provides 50 percent of the amount of their spouse’s benefit as calculated at their full retirement age. Social Security calculates and pays the higher amount.
Current spouses and ex-spouses that were married for over 10 years and did not remarry prior to age 60 are eligible to collect spousal benefits. Like regular Social Security benefits, they cannot be claimed until age 62. Your spouse must also file for their own benefit before spousal benefits can be claimed. If both spouses have similar earnings histories, it may be beneficial to collect one spouse’s benefits early and the other’s later, providing an income stream while allowing the other benefit to increase. Or, both could be delayed for maximum benefit growth. If both spouses have very different earnings backgrounds, the individual with the lower lifetime record could be claimed early or at full retirement age, and the higher-earning spouse’s benefits could be delayed.
The following chart nicely summarizes some considerations that should factor into when you choose to file for benefits:
Conclusion
If you elect to take early Social Security benefits at a reduced rate but later change your mind, you can withdraw your application and pay back the government what you’ve already received. However, this is only available within 12 months after you begin your distributions, and you’re limited to one withdrawal per lifetime.
Some are wary to delay amidst concerns about the future of Social Security. However, the 2019 annual report from the Social Security Trustees projects that the Social Security Trust Fund has enough resources to cover all promised retirement benefits until 2035 (one year later than last year’s projection) without altering the current system.
We suggest working with a financial advisor to weigh your options, carefully assess the factors that go into the decision and ultimately understand the full implications of any decision. Social Security statements and other important information can be found at ssa.gov.