For many Americans, Social Security benefits make up a significant portion of retirement income. When it comes to how much you will receive, you may be surprised to learn that you have a choice in the matter—and timing is everything. The longer you wait to claim your benefits, the larger your monthly payment will be, so when you start can determine whether you’ll have sufficient funds to achieve your retirement goals.
Here are considerations to keep in mind as you think about your Social Security choices.
When are you eligible?
Based on the year you were born, the Social Security Administration (SSA) has determined your full retirement age (FRA)—in other words, the normal retirement age at which you become eligible to receive full Social Security benefits. If you were born before 1955, you’ve already reached your full retirement age (see Figure 1). If you were born after 1960, you’ll reach your FRA at age 67.
Figure 1. Full Retirement Age (FRA)
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.
What timeline is best for you? Below is a hypothetical example. You can crunch your own numbers using AARP’s Social Security Benefits Calculator, available at www.aarp.org/retirement/social-security/benefits-calculator.
Source: Social Security Administration.The chart illustrates how benefits can differ based on the age at which you start receiving social security. It assumes a benefit of $1,000 per month at age 66. Your benefits will be based on your own work history and may differ.
From a purely mathematical point of view, most people are better off waiting to start collecting their 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 Social Security Administration (SSA) life expectancy tables, a healthy 65-year-old female’s average life expectancy is 86.6. Further, one out 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 $18,960 in 2021 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 $50,520 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 his or her 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.
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 your retirement benefits, it’s necessary to check with the SSA to understand which benefits you’re entitled to claim. Find out by calling the SSA at 800.772.1213 or visit www.ssa.gov. Verify your earnings history with the SSA’s records and correct any errors. A tax preparer or financial advisor can run financial models to help you make your decision.
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.
Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or email@example.com
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