Most of us know we are entitled to a Social Security benefit, but the amount of the benefit is different for everyone. How do you evaluate when the right time is to begin collecting this benefit?
There are many factors to consider when determining when you should start taking Social Security. You are eligible for benefits as early as age 62, but there are other factors such as Full Retirement Age (FRA) for Social Security purposes, current income, employment status, additional income sources, and life expectancy that should be taken into consideration. You may also consider if your spouse will be dependent on a portion of your social security benefit.
Age and Amount
The first consideration to look at in exploring when to start taking Social Security is what age can you take it and what the amount of your benefit will be. While 62 is when you are first eligible to begin receiving payments, you may not be aware that by taking it that early, you permanently reduce your benefit by as much as 30 percent. And if your spouse will collect on your benefit, they’ll receive a reduction in the benefit of up to 35 percent. A reduction in benefits amount will apply for any individual electing to take the benefit between age 62 and their Full Retirement Age (FRA). For individuals born 1960 and later, FRA is age 67.
You can also consider the option of waiting until you are older to receive your Social Security benefits. By delaying receipt of your benefit until after you reach FRA, you will receive a permanent increase in your benefit of up to 8 percent for each year you delay until the age of 70. That could be a very large increase – more than 60 percent if you delay from age 62 to age 70. While this option may not be feasible for everyone, it is good to consider it as a possible option.
After age 70, there is no additional increase if you continue to delay receipt of your benefits. For those considering taking their benefit prior to FRA, you may want to know if this makes sense for your finances. You can learn more by running a Breakeven Analysis calculation. This calculation will lay out at which age you would ‘break even’ compared with someone who took their Social Security benefits earlier or later. It allows you to better understand at what age it might be best for you to begin receiving these benefits. You’ll need to first login and create a social security account if you haven’t already done so. You can do this by going to https://www.ssa.gov/myaccount/. Once you have your account, you’ll have access to your benefit information for Age 62, FRA, and age 70. You can then enter these benefit amounts into an online Social Security Benefits calculator.
The second consideration is your employment status. For individuals who are still planning to work after age 62, it generally will make sense to delay taking Social Security until at least FRA for a few reasons. Since you still have a current source of earned income like wages, it often won’t make sense to cause a permanently reduced benefit by collecting early. Not only that, if you are still receiving a certain amount of earned income, you could receive an additional reduction in benefits if you’re collecting before FRA. However, if you’re FRA or older, collecting your benefit and earning income, regardless of the amount, will not cause a reduction in benefit.
The next consideration is if you have other sources of income. Perhaps you have rental properties that provide a monthly income stream, or a pension benefit you are eligible to receive by age 62. If these other sources of income are sufficient in meeting your living expenses, it likely makes sense to wait to collect Social Security until you’ve reached your FRA. If these additional sources of income continue after FRA, you could consider continuing to delay collecting your benefit until age 70 to earn the 8 percent annual increase if your other sources of income support your living expenses.
Another factor to consider if you have other sources of income is what your current tax situation is. You’ll want to be aware if taking your Social Security while having other income sources available to you could push you into a higher tax bracket. Moving from the 22% tax bracket to the 24% tax bracket may not seem unfavorable, but a move from the 24% tax bracket to the 32% tax bracket is certainly impactful. A rule of thumb for those with higher net worth is that about 85 percent of Social Security income is taxable. For certain amounts that looks more like 50 percent.
In addition, your income also determines the cost of your Medicare premiums based on your prior years tax return. For instance, your 2023 Medicare Premium is based on your Modified Adjusted Gross Income from your 2021 tax return.
Still another consideration as to when to begin collecting Social Security is your life expectancy. Some individuals have a family history of living longer, while others may have a family history of health issues that may shorten life expectancy. Or in other cases, you may already have a known health condition that would decrease your likelihood of living to a normal life expectancy age. In situations where life expectancy is shorter, it may make sense to begin collecting your benefit prior to FRA with the shorter time horizon. However, if you are healthy and your family has a history of living well into their 90s, waiting until age 70 to get the increased benefit may be more favorable for you.
Possible Spouse Benefit Impact
Lastly, you’ll want to consider how your choice in when to begin collecting your Social Security benefit will impact your spouse’s benefit. In situations where you were the higher income earner during your working years, your spouse has the option to collect 50 percent of your benefit in place of their own benefit, whichever would provide the higher benefit. However, if you choose to collect at age 62, their benefit could be reduced by as much as 35 percent. To put this into perspective, say your benefit at FRA is $1,500. If you would choose to collect at age 62, you would decrease your benefit to about $1,050. Your spouse is entitled to 50 percent of your benefit. But instead of collecting $750 (half of $1,500), your spouse would collect $487.50 (65 percent of $750).
Overall, the right time to collect your Social Security benefit will be different for each person. You should look at each consideration listed above and view them together as a whole to determine what makes the most sense given your unique circumstances. Working with a financial advisor can help you navigate through these considerations so that you feel comfortable and confident in the decision you make.
If you are looking for a second opinion, expert guidance from a CERTIFIED FINANCIAL PLANNER® Professional, or simply have questions about the right strategy for your retirement, Domani Wealth’s advisors are always ready to start a conversation. You can get in touch with us easily by calling 855-855-5455, emailing [email protected], or reaching out to one of our team members.