Determining the best time to take your Social Security benefits is a complex decision. You might have heard you’re supposed to wait until at least full retirement age. But that broad advice doesn’t always work for everyone. Countless factors, like your health or your ability to work, may make postponing Social Security the wrong decision.
The best strategy for timing Social Security is the one that works for you. To help you get your strategy right, start by asking yourself the following questions.
Are You Still Working?
Americans may file for Social Security benefits when they turn 62, even if they are still collecting a paycheck. However, starting Social Security benefits at age 62 is four to five years before full retirement age (between 66 and 67, depending on when you were born), which is when you can expect to receive a full, unreduced benefit.
If you begin taking Social Security benefits early, each there is month between your start date and your full retirement age permanently reduces your monthly payment by about half a percent.
In addition to seeing a permanent reduction in monthly benefit, if you are still working while collecting early benefits, you may see some of your Social Security payments withheld because of something called the earnings test. If you haven’t reached full retirement age, you will see $1 of your Social Security benefits withheld for every $2 over $18,960 that you earn. This test changes to a withholding of $1 in benefits for every $3 you earn above $50,520 up to the month of your birthday during the year you reach full retirement age.
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Take a 63-year-old beneficiary who is earning $35,000 per year while also taking Social Security benefits. Their annual income is $16,040 above the earnings test limit, which means $8,020 will be withheld from their Social Security benefits.
It’s important to note that the amount withheld will be credited back—you’ll just have to wait until you reach the Social Security full retirement age. But it’s vital to keep the impact of the earnings test in mind when determining how much Social Security income you can count on in the years leading up to full retirement age.
Once you reach the Social Security full retirement age, you can work as much as you’d like without imperiling your monthly benefit, though you’ll still be on the hook for income taxes.
Are You Married?
Your marital status can also affect your timing decision. That’s in part because married beneficiaries may be eligible for a spousal benefit based upon their spouse’s work record.
Married people without a sufficient work record to qualify for their own retirement benefits (or who simply would earn more by relying on their spouse’s) can expect to receive a benefit of up to 50% of their spouse’s primary insurance amount (PIA). Remember, PIA is the full, unreduced benefit a person would receive as of full retirement age. However, taking the spousal benefit prior to full retirement age means it will be reduced, and there is no spousal benefit increase for delaying past retirement age.
The size of the spousal benefit is not affected if the higher earner takes benefits prior to full retirement age. So even if the higher-earning spouse takes early benefits, the lower-earning spouse can expect a spousal benefit based on the unreduced PIA of the higher earner.
However, that doesn’t mean that a higher earner taking early benefits has no effect on a lower-earning spouse. According to Liz Weston, certified financial planner and author of “The 10 Commandments of Money,” “most people should wait as long as possible [to file for benefits], but it’s particularly important for the higher earner in a couple to delay, since that’s the benefit that determines what the survivor gets.” Because survivor benefits are based on the actual benefit amount of the decedent, rather than simply the PIA, waiting to take benefits as a higher earner can increase your spouse’s future benefit if you pass before them. And keep in mind: If your spouse dies, you will only be eligible for one benefit: the higher of yours or theirs, not both.
Are You Currently Healthy?
Your health status may affect your timing decision, although possibly not in the way you expect. Beneficiaries already struggling with poor health in their early 60s may be tempted to take benefits as early as they can.
Receiving lower payments earlier means you get more benefits over a lifetime if you pass away relatively young. In general, the “break-even” point falls at about age 80 and 4 months when comparing lifetime benefits starting at 62 with a reduced benefit and starting at 70 with an increased benefit. For those who are currently ill and concerned they won’t live to age 80, early benefits may sound like the right call.
But Weston cautions against this: “Starting early is a common timing mistake, especially if you think you won’t live beyond the break-even age where the larger checks for waiting more than offset the smaller checks you passed up.” Weston’s concern about this strategy is if you outlive the break-even point and are stuck receiving a reduced benefit while also suffering from poor health. “Most people don’t understand how long they’re likely to live and the risks if they outlive their savings,” Weston explains. Be sure to take careful stock of your financial and physical health when deciding when to start benefits.
Do You Have an Immediate Use For the Money?
One of the most common reasons for taking Social Security early is simply because you need it. If your Social Security benefit is the only way you can keep the lights on, then it’s reasonable to file for it when you need it. However, it’s important to remember that working longer in your 60s to delay Social Security may be far easier than living on a reduced benefit in your 80s, especially if you’re physically able to work now.
But what if you have no immediate use for the money but think you might be able to manage it better than Uncle Sam? Your Social Security benefit can feel like “free” money you can take now to grow into larger retirement income later. But Weston and Kate Horrell, an Accredited Financial Counselor and the founder of KateHorrell.com, don’t see this as the optimal use of your Social Security benefit.
“You may invest your Social Security income, but it does not count as earned income to be placed into an individual retirement account (IRA),” Horrell points out. That means if Social Security is your only income, you may not be able to contribute to an IRA, and if it isn’t, you’ll be limited to the lesser of $7,000, the IRA contribution limit for those over 50, or the amount you make outside of Social Security.
You’ll also be taking on substantial risk to get a level of return Social Security itself will provide. “You aren’t going to get a guaranteed 8% annual return,” Weston says, referencing the approximate 8% long-term average annual return of major indexes like the S&P 500. “8% per year is what you get by delaying past your full retirement age (until your benefit maxes out at 70). Elsewhere, getting an 8% return requires a substantial risk that you’ll lose money.”
The Bottom Line on When to Start Social Security
Timing your Social Security benefits is a complex decision that will vary from person to person. Knowing the answers to the above questions will help you gauge when might be right for you, but consider speaking to a retirement professional, like a Certified Financial Planner (CFP), to map out when may be the right time to file for Social Security.