One of the most crucial financial decisions for anyone nearing retirement is when to begin receiving Social Security (SS) benefits. This decision will affect what is, for most people, a primary source of retirement income. Here are some of the main factors to consider in making this decision.
Whether you qualify for Social Security depends on how many SS credits you've earned. You get a maximum of four credits per year by earning at least $4,640 (as of 2013) on which you pay SS tax. Anyone born in 1929 or later needs 10 years of work (40 credits) to be eligible for retirement benefits.
Your monthly benefit amount is primarily determined by two factors: the average of what you earned during your 35 highest-earning years, and your age when you elect to begin receiving benefits. (You can create an account at SSA.gov to review your earnings history and estimated benefits.)
Assuming you have paid enough into the system, you are eligible to receive benefits as early as age 62. However, you'll receive a much higher monthly amount if you wait until your "full retirement age" (FRA), and even more if you wait until age 70. Your FRA is somewhere between 65 and 67, depending on when you were born. It is 65 if you were born in 1942 or earlier, 66 if you were born between 1943 and 1959, and 67 if you were born in 1960 or later.
When to claim
About half of all people eligible for SS benefits elect to take those benefits as early as possible. Their reasons vary. Some simply need the money. Others point to the uncertainty of their future health, or the health of Social Security. Still others make the decision after calculating their "break-even point" — how long it would take before the total of delayed benefits would exceed the total of early benefits. Let's look at an example using my estimated benefits.
According to the SS website, I would receive $1,529 per month if I started drawing benefits at age 62. I would receive about 50% more ($2,273 per month) if I waited until my full-retirement age of 67, or nearly 90% more ($2,873 monthly) if I waited to begin until I was 70.
Social Security provides an annual cost-of-living increase based on the Consumer Price Index (CPI). This increase was 1.7% in 2013; therefore, this percentage was applied to the annual benefit payments in the table above. (President Obama's proposed fiscal 2014 budget calls for a change in how the cost-of-living increase is calculated. The idea is to switch from the CPI to the "Chained CPI," a calculation that generally results in a reduced inflation rate and therefore would reduce the annual cost-of-living increase, by about .25 percentage points per year.)
As you can see in the table, I would have to live to age 78 for the decision to delay benefits until my full retirement age of 67 to pay off. In like manner, waiting until I reach age 70 to start benefits becomes the best long-term decision if I live to at least age 82.
Since the decision to delay benefits increasingly pays off the longer you live, all you need to know to determine the optimal time to begin receiving benefits is how long you'll live! Without that knowledge, the best you can do is use the life expectancy calculator on SSA.gov — and consider your family's longevity history.
Because of today's generally longer life spans, most people would be better off waiting until they reach their full retirement age before taking benefits.
Reasons to consider taking benefits at age 62
As I've stated, about half of those eligible for SS benefits begin taking them at age 62. Let's look at some of the reasons you might choose to do so as well.
- Are the longevity odds stacked against you?
If your family history or personal health situation indicates your odds of reaching an advanced age aren't that good, waiting to start collecting SS benefits may not be wise.
- Are you likely to lose your job soon?
If your employer mandates retirement before you reach your SS full retirement age, or the demands of your job or health issues make it difficult to continue working as you get older, you may need to start your benefits sooner (depending on your level of personal retirement savings).
- Do you have plenty of retirement savings?
If you have abundant retirement savings accumulated and will never need to rely on your SS benefits for lifestyle support, then it becomes a "How do I maximize my estate?" question. In that case, the advantages of starting your benefits early are significant. By investing your benefits instead of spending them, the total you could amass by starting at age 62 will almost certainly be more than you could accumulate after waiting four or five years, even allowing for the larger benefit.
Reasons to begin collecting benefits at your full retirement age (or later)
- Can you afford to retire on the lower age-62 benefits?
It could be that the reduced early benefit isn't enough to cover your anticipated monthly expenses. Waiting until full retirement age will provide a higher monthly check — 100% of your earned benefit. Plus, if your current salary is higher than it was in any of the 35 years on which your benefit would currently be based, continuing to work will increase your benefit amount. Not to mention that you'll have extra time to add to your savings, as opposed to starting to withdraw from your savings sooner. For many people, those are three solid reasons to keep working.
- Do you want to continue working?
If you start receiving benefits at age 62, then until you reach your full retirement age you can earn only $15,120 (in 2013, adjusted annually) without your SS benefits being reduced. For each $2 earned above that threshold, you lose $1 in benefits. However, workers who wait until they reach full retirement age before collecting benefits can continue to work without any reduction in benefits.
- Do you need or want your current private health insurance?
The eligibility age for Medicare is age 65. If you retire at age 62, what will you do about health insurance? Think carefully about the quality of the health insurance and other benefits provided by your employer. You may find that the insurance your employer provides is more comprehensive and flexible than Medicare, which could be reason enough to continue working beyond age 65.
- Will your spouse need to rely on your benefit someday?
Your spouse will receive a higher survivor benefit after you're gone if you work to your full retirement age or beyond.
Other important factors
- Medicare and Social Security benefits are tied together in a surprising way.
Once you reach age 65 and are eligible for Medicare, you cannot enroll in Social Security without automatically being enrolled in Medicare as well. This means that if you refuse to apply for Medicare, the government will not pay your SS benefits.
Why would you not want to enroll in Medicare and receive those medical benefits? Possibly because you believe Medicare is an inferior system that restricts seniors' access to health care because of its administration and looming bankruptcy. In that case, you might prefer to retain your HSA account and current private health insurance. Unfortunately, those options would no longer be available to you once you enroll in Medicare. So, bear in mind that at age 65 and later, you will be forced into Medicare if you elect to begin receiving SS benefits. This can complicate the timing decision.
- Coordinating benefits with your spouse.
If you're married and one spouse has a higher SS benefit than the other, some advisors recommend an approach known as "file and suspend." The factors involved in undertaking such a strategy are complex and beyond the scope of this article.
If you'd like to learn more, AnalyzeNow.com offers a free "Strategic Social Security Planner" on its site that can help you explore this option. There are also fee-based services, such as SocialSecuritySolutions.com and MaximizeMySocialSecurity.com, that are designed for the same purpose. Or you might consider meeting with a fee-only financial planner who specializes in helping people maximize their SS benefits. Getting this decision right can be worth many thousands of dollars, so it's worth paying for expert counsel.
- Factoring in taxes.
If you have taxable income while receiving Social Security, up to 85% of your SS benefits may be taxable. That taxable income includes wages, dividends, interest, and more. Married couples filing jointly with taxable income between $32,000 and $44,000 may have to pay tax on as much as 50% of their SS benefits. Further, if taxable income exceeds $44,000, they may have to pay tax on up to 85% of their benefits.
Don't wait until you're knocking on retirement's door before you begin thinking about Social Security. The sooner you start planning, the better you will be able to maximize your benefits.