Deciding when to start taking Social Security benefits is an important decision that everyone needs to make at some point. There are four factors that can help you in making this decision:
- Will you work between age 62 and your full retirement age?
- Your life expectancy
- Your marital status
- Your desire to protect your purchasing power should you live longer than you might expect
1. Will you work between age 62 and your full retirement age?
62 is the earliest age at which you can claim your retirement benefits. At full retirement age, you receive 100% of your benefits. Full retirement age is generally 66-67, depending on the year you were born. You may think that starting to take your Social Security benefits as early as you can would be beneficial, but if you’re still working while receiving your benefits, this can be bad for a couple reasons. First, by claiming your benefits early, your monthly benefits are reduced compared to waiting until you’re at full retirement age. The second reason is if you earn over the Social Security earnings limit, your Social Security benefits will be reduced. This will also cause more of your benefits to be taxed.
2. Your life expectancy
If you live to your standard life expectancy, believe it or not, you will get almost the same amount whether you take Social Security early, or wait until later to take it. Certain health and lifestyle factors will affect your own personal life expectancy. Just as an insurance company would do underwriting, an analysis on your own personal life expectancy, using a life expectancy calculator that will ask you health and lifestyle related questions should be recommended.
3. Your marital status
If you’re single, one of the primary factors to think about is life expectancy. A break-even analysis based on how long you live can be a good starting point. Taxes should also be considered. In fact, for some, delaying the receipt of Social Security and instead taking distributions from other retirement accounts earlier, may provide some extra Social Security benefits, once you start taking them.
Things aren’t as simple for married couples. For the higher wage earner in the marriage, it generally makes sense to wait as-long-as possible to claim your benefits. One reason for this is, since Social Security payments are based on mortality tables that haven’t been updated since 1983 and people are living longer today than they were in 1983, the credits that you get for delaying Social Security are worth more to you than they would be if they were actuarially fair. The other reason is since we’re currently experiencing low interest rates, every year that you delay taking your benefits, your benefits increase by 6% – 8%. This is a guaranteed rate of return, that’s difficult to get out in the marketplace.
For the lower earning spouse, it generally doesn’t make sense to wait to claim your benefits beyond full retirement age because they have choice to either receive their own benefits or spousal or survivor benefits based on their spouse’s record, whichever is higher. Often this results in the benefits they are eligible to receive through their spouse will exceed what they would receive if they waited until age 70.
4. Your desire to protect your purchasing power should you live longer than you might expect
Most people want to collect their Social Security benefits as soon as they’re eligible, which is 62. This decision is often made without understanding the long-term consequences. If you live into your 80’s, you could be giving up anywhere from $50K – $150K in additional income in additional income by making a quick decision about collecting your Social Security benefits. Social Security benefits have a cost of living adjustment built into them, which means your Social Security income will increase with inflation. Delaying your start date can help in making the most of your Social Security benefits and offer a tremendous amount of income protection later in life.
If you have more questions on Social Security benefits call LSL CPAs at (714) 672-0022.