For many, the question of when to begin taking social security retirement benefits can be daunting. On the one hand, applying for benefits early is tempting due to the prospect of receiving a little extra cash sooner. On the other hand, taking social security early means that you are penalized and receive a lesser amount, which causes many people to ask the question: should I wait until full retirement age or even later?
As with many financial questions, the answer is that it depends. For many, the decision for when to begin taking social security should be a decision made within the context of a larger financial plan. For some, developing a social security strategy that maximizes payments for both spouses can significantly benefit the overall plan. For others, social security is a small piece of the puzzle and makes up a smaller portion of their retirement income, making it easier to be flexible as to when to turn on the benefit.
To better understand when to begin taking social security, it would be helpful to step back and understand how social security works. The Social Security Administration (then Board) was established in 1935 with the goal of supplementing the income of the less fortunate. While this fact may seem like a boring history lesson, it’s important to remember that social security has always been intended to supplement income – not replace it – and should be viewed as such. There are many types of social security benefits, but the most relevant one to financial planning is the retirement benefit. As you probably know, social security is funded by everybody who works and pays social security taxes on their earnings.
Consequently, you are only eligible to receive social security if you paid into it for at least 10 years; however, the social security administration eventually added a spousal benefit for homemakers which allows them to receive half of their spouse’s benefit (in addition to the spouse receiving the full amount). Once you reach the retirement age, the benefit you receive is based on a calculation that takes into account an average of your highest earnings and inflation. This is where the question of when to begin taking social security comes in.
The age at which you are supposed to begin taking social security, what is known as “Full Retirement Age” (FRA), is somewhere between 66 and 67 (depending on when you were born); however, you are allowed to begin taking social security as early as 62, but there is a catch. When you file for social security early, you receive a reduced amount of what you would have received if you had waited until full retirement age (up to 25% less). On the flip side, if you delay retirement you will receive up to 8% more per year for each year that you wait (until you reach age 70). If you have a spouse who is also eligible for a portion of your benefits, delaying increases not only what you will receive, but what they will receive as well. Put simply, it pays to wait.
Returning to the question of when you should file for social security, there are a couple of variables to take into consideration. The first thing to look at is life expectancy. While it’s impossible to know how long you will live, it is important to consider the history of longevity in your family. If longevity seems likely for you, then it would make sense to wait; however, if there is a history of sickness in your family and short lifespans it would make sense to consider earlier options, as the breakeven for most plans (the point at which waiting begins to result in a greater total benefit) is usually in a person’s late 70s. Secondly, you’ll want to look at the nature of your income in retirement. Social security should be used to supplement your other sources of income such as IRAs, pensions, or annuities. For most individuals, delaying taking social security can result in significant gains, particularly when you recognize that by delaying the benefit you are locking in guaranteed returns on your benefit, which also allows you to pull less from your other sources of income in the future.
As mentioned previously, we believe the best way to make wise decisions is to make them in the context of a well thought out plan. To learn more about social security and other tips and tricks of financial planning contact one of our advisors today.