You've paid into Social Security for years, and now you're finally reaching the age at which you can start collecting your hard-earned benefits. But when should you begin?
Are you better off filing for Social Security benefits as soon as you hit age 62, waiting until your full retirement age, or holding off even longer?
Deciding when to start your Social Security benefits is one of the most important retirement decisions you'll make. Here are some factors to consider.
The decision of whether to delay Social Security benefits is a trade-off: give up benefits now, in exchange for higher payments in the future. If the higher payments are received for enough years, the retiree can more than recover the benefits passed up on.
Those who qualify for a Social Security retirement benefit can apply as early as age 62 with their maximum benefit available at age 70. Age 62 remains the most prevalent age at which people apply for benefits. However, waiting a few years can really add up.
For those who don’t yet want or need their Social Security retirement benefits at full retirement age, the Social Security system allows individuals to delay their benefits and earn an 8%/year “delayed retirement credit” instead.
Your Full Retirement Age (FRA) is important as this is the age at which you become eligible for a full (or unreduced) benefit. This is also the age at which there are no benefit reductions based on the amount of earned income (income from employment) you make.
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 and later
Waiting until age 70 allows you to claim the maximum benefit possible, there are no increases by waiting past age 70 to claim your benefit.
Predicting How Long We'll Live
In an ideal world, everyone would wait until age 70 to claim their benefit. But that isn’t always the right choice. While we can’t predict how long we will live, if you don’t have a history of longevity in your family or if you are suffering from an illness that you feel might shorten your life expectancy, it can make sense to take your benefit as early as age 62. The break-even point, in terms of lifetime benefits received, between filing at age 62 and waiting until your FRA is generally somewhere in you late 70s. In other words, if you live past your late 70s, you would be better off waiting to claim until your FRA. If you don’t, you’d receive more money by claiming earlier. The break-even for waiting until age 70 is generally your mid 80s.
Making Too Much Money : Reduced Benefits
If you claim your benefit prior to your full retirement age, you could be subject to a reduction in the amount of your benefit if your income is too high. While you eventually will receive payment for any reduced benefits, why file early if you are in this situation? Your current benefit is reduced and your lifetime benefits are permanently reduced as well.
|Under Full Retirement Age||$16,920||For every $2 over the limit, $1 is withheld from benefits|
|In the calendar year Full Retirement Age is reached||$44,880||For every $3 over the limit, $1 is withheld from benefits until the month in which Full Retirement Age is reached|
|At Full Retirement Age or older||No Limit||None|
*** It's important to note that earned income is defined as income from work vs interest or investment income.
Taxes and Social Security
Social Security benefits may be subject to federal income taxes based upon your income level. There are no age limits on the taxability of benefits. Benefits are not subject to state income taxes, EXCEPT in 13 states including Kansas. For most people, your income from employment will generally go down at some point as you age. This lowers any potential taxation of your benefits and is another reason to wait as long as possible to claim your benefit.
Considerations for couples
Delaying Social Security impacts not only the retirement benefit, but the survivor benefit too! In the case of a married couple, the likely impact of delaying Social Security benefits can be even more favorable. The reason is that with a married couple, when one person passes away, the survivor is eligible for a widow(er) benefit equal to 100% of the deceased spouse’s retirement payments. Which means the decision to begin retirement benefits early or delay them late impacts not only the size of the retiree’s own benefit, but the size of the survivor benefit that will be payable to a spouse as well.
Thus, the benefit of delaying retirement benefits as the member of a married couple is that the higher benefit will be payable for the life of the retiree, and the lifetime of the survivor if the retiree passes away first. In other words, as long as either member of the couple lives long enough to see the breakeven period, it pays to have delayed – either in the form of a higher (delayed) retirement benefit, or a higher survivor benefit based on that delayed retirement benefit! Which means the odds of reaching the breakeven period for a couple increase significantly, as it’s no longer based on the life expectancy of the retiree, but instead on the joint life expectancy of the couple instead!
Social Security is a key part of retirement income for those who are eligible for a benefit. Deciding when to claim your benefit is critical, the wrong decision can be costly. I specialize in helping retirees coordinate the timing of their Social Security benefits. If you'd like to discuss your situation, please give me a call at (785) 256-9150 or schedule your FREE initial consultation here.
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About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.