I'll show you how your monthly Social Security payment is affected if you claim early at age 62 or delay until 70. Determine the best strategy for your retirement by understanding the complex rules around spousal benefits, taxes, and work earnings.
Just because you can do something does not mean you should do that thing. I’m sure you’ve heard that before. I know I have, and I know I’ve said it myself a time or two.
Just because you’re eligible to collect Social Security at age 62 doesn’t mean that you should. It also doesn’t necessarily mean that you shouldn’t. As with most retirement decisions, there are many factors to consider, and deciding when to take Social Security depends on your circumstances. Today, I’m going to discuss how to help you decide when to claim your Social Security benefit.
I’m sure most of you know, that you can start taking Social Security as early as age 62, or age 60, if you're a survivor, or at any age, if you have a disability, or you can wait until you've reached full retirement age or at the latest, age 70.
What we generally like to advise is that if you can afford to wait, then you should, because of the risks it can help mitigate over a long retirement.
Here’s what you need to know:
What is “Full Retirement Age”?
Full retirement age is when you're eligible to receive your full Social Security benefits. Your full retirement age depends on your birth year, and for anyone born in 1960 or later, full retirement age is 67. It’s younger for those born before 1960, but for this video, we’re going to use age 67 for simplicity’s sake rather than go into the formulas and age changes.
If you want to know your benefit at different ages, simply log into the SSA website and it will tell you. That’s the easiest way to see what you will receive, and I won’t confuse or bore you with all the 5/9ths of one percent per month reduction if claimed early jargon that isn’t really going to help us much with this conversation anyway.
What if You Take Benefits Early?
If you take your Social Security benefit before your full retirement age, it will be permanently reduced. For example, let's assume you stop working at age 62 and your full retirement age is 67, and you decide to start benefits at age 62, your benefits would be permanently reduced by 30%.
Let’s put this in dollar terms to help it sink in. Let’s say your full retirement benefit at 67, is $3,000 per month. If you took your benefit early, at 62, you would only receive $2,100 per month.
What if You Delay Taking Your Benefits?
If you retire sometime between your full retirement age and age 70, you will earn a "delayed retirement credit” for your benefits, and this equates to 8% per year, for each year you wait past full retirement age. Now, to put some dollars to this, if you wait until age 70, well that’s 3 years past FRA, so 3 years x 8% = 24%. And if your FRA benefit is $3,000 and you wait until 70, your benefit will be $3,720 per month. And this does not include any potential adjustments for inflation.
Things to consider for when you should take your SSA benefits:
1. Breakeven point:
It’s common to calculate your breakeven point to determine which option will generate the most income over your expected lifespan. The breakeven point is typically around age 80 give or take a couple years.
2. Your life expectancy:
If you have good health on your side and good longevity in your family line, then waiting for a larger monthly check might be a good deal. On the other hand, if you're in poor health and don’t think your odds of having a long retirement are good, you might decide to take what you can while you can.
3. Your cash needs:
If you're considering early retirement and you have the resources, like a pension or a nest egg of investment accounts, or any other sources of income, you can be more flexible about when to take Social Security benefits. Obviously, if you have limited resources, you may want to consider postponing retirement or working part-time until you reach your full retirement age or beyond, so that you can maximize your Social Security benefits.
4. Your marital status:
If you're married, you should consider both yours and your spouse's age, health, and benefits. At full retirement age, you can take either 100% of your own retirement benefits or 50% of your spouse's, whichever is higher. Sometimes we like to advise a “bridge” for married couples. This means that we have the higher earning spouse wait until age 70 to claim, while we have the lower earning spouse claim at:
- Their own retirement
- At the retirement of the higher earning spouse
- Or at age 62
And you should claim at whichever of these 3 is the latest.
Also, if you're widowed, you can receive either your own retirement benefits, or up to 100% of your spouse's benefits, whichever is higher, but you cannot claim both.
Quick note: If you're divorced and you were married for 10 years or more, you can receive benefits based on your ex-spouse's Social Security record and get up to 50% of their full retirement benefits, and this will not have any impact on their or your current spouse's benefits.
5. Your employment status:
Earnings can reduce your benefit, temporarily, if you take Social Security early. If you're still working and you haven't reached your full retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit.
If you wait until you reach your full retirement age, your benefits are no longer reduced no matter how much you earn.
This is also important, people often think that they’ve lost the money if they have a reduction in benefits due to the earnings test, but this is not the case. You will get the money back in the form of a recalculated, higher benefit beginning at full retirement age. So don’t lose sleep over that.
6. Social Security tax implications:
Your Social Security benefits may be taxable, depending on your income and the "provisional income formula," and the 50% and 85% thresholds that go along with it.
Also, if you have large pre-tax retirement accounts like a 401(k) or IRA, you may want to postpone your benefit, let it grow and do some good tax planning in your gap years between retirement and age 70 because Uncle Sam will get his share of your pre-tax money at RMD age if you haven’t done anything with it.
You should consider taking benefits earlier:
- If you're no longer working and can't make ends meet without your benefits
- If you’re in poor health and don't expect to reach your breakeven age
- If you're the lower-earning spouse, and your higher-earning spouse can wait to file for a higher benefit later
You should consider waiting to take benefits:
- If you're still working and make enough to impact the taxability of your benefits. You should at least wait until your full retirement age, so benefits aren't further reduced due to earnings.
- If either you or your spouse are in good health and expect to exceed breakeven age
- If you're the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit
- If you want to mitigate sequence of return risk; this is the risk of taking too much from your investment accounts early in retirement, after the market has had large negative returns, which will cause your investment accounts to run out of money too soon.
- If you want to mitigate longevity risk, which is basically the risk of living too long. You want to make sure you don’t outlive your income sources or that your income isn’t too low later in your life. This is actually the reason Social Security was implemented in the first place.
Also, never wait until after age 70 to take your Social Security benefits. This will not help you.
Another question I hear: Tim, is Social Security going to run out of money and I won’t get my benefit?
It doesn’t work like that. Worst case scenario is that benefits would be reduced, so any delayed credits would still be beneficial.
As of 2023, the Social Security Trust Fund is projected to have enough resources to cover all promised benefits until 2034 when, absent a change from Congress, benefits would need to be cut for all current and future beneficiaries to about 80% of scheduled benefits. It is, however, likely that changes to the full retirement age or means testing, or maximum taxable earnings or some combination of those will be changed to allow continued benefits for those that need them most.
If you have a choice and are in good health, think seriously about waiting as long as you can to take your benefits (but no later than age 70). A long retirement coupled with uncertainty about markets and inflation are your biggest risks. Delaying Social Security, if you can, is effectively an insurance policy against those risks.
At Eagle Ridge Wealth Advisors, we like to advise people to wait to draw Social Security, if they are able, so that we can either make some moves for them to lower their lifetime tax liability, or, if the markets take a big hit, they have the option to claim their benefit at any time. Having more levers to pull, or more options, is always a good thing.
As always, there are many factors to consider and please reach out if you’d like to have chat about them.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.