Should I Wait to Start My Social Security Benefits?
Presented by Theresa Rosen, CFP®, CLTC
Deciding when to begin taking your social security retirement benefits can be difficult because there are many factors to consider. Even if you plan to keep working, social security benefits are available to most workers as early as age 62, but you can delay collecting until age 70 or choose any age in between.
The first step in making your decision is to determine your full retirement age (FRA)—the age at which you can collect your full benefits. For workers born between 1943 and 1954, the FRA is 66; for those born later, the FRA gradually increases to age 67. Claiming benefits prior to your FRA can reduce your monthly payment by as much as 30 percent—but you will receive benefits for a longer period. If you postpone claiming benefits beyond your FRA, your social security payment will increase by a certain percentage, depending on your year of birth, until you reach age 70.
It’s important to consider your options carefully. The decision to claim benefits early can result in a lower standard of living for the rest of your life. And claiming later can mean more financial security for your surviving spouse.
The benefit reduction incurred by claiming early is permanent. If you elect to start receiving benefits early, your benefits will still be increased annually by cost-of-living allowances. But despite social security’s annual inflation adjustment, your payments may never equal the benefit you would have received by waiting until your FRA.
Source: Social Security Administration (SSA). The chart illustrates how benefits can differ based on when you start receiving social security. It assumes a benefit of $1,000 per month at age 66. Your benefits will be based on your work history and may differ.
Questions to Ask Yourself
From a purely mathematical point of view, most people are better off waiting to start collecting social security benefits, but there are questions you need to ask yourself.
Do you need the cash? If you need help paying for basic living expenses, you probably should elect to begin receiving benefits as soon as possible.
How is your health? According to the most recent SSA life expectancy tables, a healthy 65-year-old woman’s average life expectancy is 86.6. Further, one of every four will live past age 90.
In any case, it is important to consider your family’s pattern of longevity. The longer you live, the more you benefit from delaying. If your health and family history predict a long life, you may be better off delaying your benefits until FRA or later.
If you don’t expect to attain a normal life expectancy and you are single, consider taking benefits early. But if you are married, be aware that doing so will reduce your spouse’s survivor benefit.
Will you continue to work? If your working wages are greater than $19,560 in 2022 and you selected early benefits, your (and your dependents’) social security benefits will be reduced by $1 for every $2 you earn. If you earn more than $51,960 in the year you reach your FRA, your benefits will be reduced by $1 for every $3 you earn. After that point, working has no effect on the amount of your benefit, though it may affect whether your benefits are taxed.
Although your benefits will be reduced if your earned income exceeds the threshold, this is a temporary reduction. The SSA will recalculate your benefits at your FRA and credit any months when your earnings from work completely offset your monthly benefit. Further, since your benefit includes your highest 35 years of indexed earnings, wages you earned today may replace lower-earning years in the benefit calculation, which could result in higher benefits.
How much do you earn from pensions and other investments? For retirees earning more than $25,000 ($32,000 for married couples), 50 percent of your social security benefits will be taxed. If you earn more than $34,000 ($44,000 for married couples), 85 percent of your social security benefits will be included in your taxable income. To determine your income for this purpose, the IRS looks at wages, self-employment, interest, dividends, and otherwise tax-free municipal bond income. The IRS adds all these to one-half of your social security benefit to determine how much of your benefits will be taxed.
Are you in a high tax bracket? Because social security benefits may be taxed, those in the highest tax brackets and with other sources of income can benefit from delaying social security, thus deferring taxes.
Were you or your spouse born in 1953 or earlier? Normally, if both you and your spouse are living, the SSA will pay you the higher of your own social security retirement benefit or 50 percent of your spouse’s benefit. If you were born in 1953 or earlier and delay benefits until your FRA, however, you will have a choice of either benefit.
One strategy would be for the lower-earning spouse to take reduced benefits after age 62 and for the higher-earning spouse to wait to take a spousal benefit at their own FRA. Then, at age 70, the latter would switch to a benefit based on their own work history. This would allow you to accrue delayed retirement credits and provide a higher benefit. But, because the rules are somewhat complicated, consult your local social security office about your eligibility for this strategy.
Are you a surviving spouse? As a widow or widower at FRA, you are eligible for 100 percent of what your spouse’s benefits would have been if they were living. Reduced survivor benefits are available at age 60. Taking a reduced survivor benefit does not affect the benefit based on your own earning history. Thus, you can apply for a survivor benefit and switch to your unreduced retirement benefit at your FRA or later. Conversely, you can apply for you own reduced retirement benefit first and switch to the survivor benefit at FRA. This decision should be based on your personal situation.
Will you spend or save your social security benefits? You may be able to earn more on your reinvested payments than you lose by taking a reduced benefit. A tax professional can calculate the after-tax, break-even interest rate that would be necessary for this strategy to make sense.
Before you can decide when to take retirement benefits, it’s necessary to check with the SSA to find out which benefits you’re entitled to claim. Verify your earnings history with the SSA’s records and correct any errors. Based on the social security benefit statement and your recent tax records, a tax preparer or financial advisor can run financial models to help you make your decision.
Take your benefits early
Wait until your FRA
Delay benefits up to age 70
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Prudence Financial, Inc. is located at 365 Boston Post Road, Suite 203, Sudbury, MA 01776 and can be reached at 978.443.2411. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Financial planning services and fixed insurance products offered through Prudence Financial, Inc. are separate and unrelated to Commonwealth.
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