Age 62 is the most popular age for individuals to start taking their Social Security. With as much as a 25%-30% permanent reduction in retirement benefits, why would the majority of 62 years olds still start their Social Security benefits the moment they are eligible for benefits? There are many reasons. Some are valid; however, the reasons I have heard over the years tend to be concentrated on the following:
- I want to get as much of my money out now before the money runs out
- I will never live long enough to come out ahead if I wait to take benefits
- I don’t trust the government, so I am getting what I can now
Rarely do I hear the individual needs the money right now. I know this is the case in many circumstances, but it is rarely the reason given when I have asked why someone made the decision to start their Social Security benefits at age 62.
Before we discuss the questions you should ask before taking your Social Security benefits, let’s review the impact your decision has on your immediate and long-term income benefits. If you take your Social Security benefits at age 62, you are going to receive a permanently reduced benefit. The amount of this reduction depends on when you will reach full retirement age (see table 1). When you reach full retirement age, you receive 100% of your earned benefit plus any Cost of Living Adjustment increases awarded since you turned 62. If you are able to delay taking your Social Security benefits until age 70, you will receive an 8% Delayed Earning Credit each year you wait. That could mean a 32% raise over 4 years for someone with a full retirement age of 66.
Once you reach age 70, there are no more delayed earned credits. Knowing these details about when you take your Social Security benefit is one thing, but understanding how each of these decisions would impact your short and long-term retirement income security is what is most important. Unfortunately, most of us do not break out the calculator and put pencil to paper to figure out what decision would be best for our particular situation. So, to help you determine when taking your Social Security benefits is best for you (and your spouse), I will explore those questions you really should answer before applying. Remember, once 12 months has elapsed after you begin receiving your Social Security benefits, your decision becomes irrevocable. If you erred, there will be no going back. It’s best to plan ahead.
Table 1 assumes a $2,000 monthly full retirement age benefit:
Full Retirement Age Benefit @ $2000.00 monthly
|Year Born||Age to Receive Full Retirement Benefit||Percentage Reduction When Starting Social Security Benefits at age 62||Benefit Amount after Reduction When Starting Social Security Benefits at Age 62||Benefit Amount at Full Retirement Age 1% COLA Annual Adjustment||1% COLA Annual Adjustment & Delayed Earned Credits After Full Retirement Age|
|1955||66 & 2 months||25.83%||$1,483||$2,085||$2,901|
|1956||66 & 4 months||26.67%||$1,467||$2,088||$2,860|
|1957||66 & 6 months||27.5%||$1,450||$2,092||$2,819|
|1958||66 & 8 months||28.33%||$1,433||$2,095||$2,779|
|1959||66 & 10 months||29.17%||$1,417||$2,099||$2,739|
|1960 and later||67||30%||$1.400||$2,102||$2,722|
Table 2: $2,000 FRB with 1% COLA
|Benefit Age||If Benefit Started at 62||If Benefit Started at 70|
Questions you must answer before starting your Social Security benefits:
Do you need the income right now?
This is especially important if you are younger than your full retirement age or considering starting your benefits at age 62. If you start your benefits before full retirement age, you are volunteering for a permanent reduction in benefits as mentioned earlier. In the short term, you may believe you made the right decision. However, do you know how the decision to start benefits early will affect your retirement income 10, 15, 20, or 25 years down the road? If not, you should consider the long-term impact on your retirement income before you apply to take your benefits.
In addition to having your benefits permanently reduced by starting benefits before your full retirement age, you will need to contend with the annual earnings test. The annual earnings test comes into play if you earn more than $16,920 in 2017 from work. This test will reduce the Social Security benefit $1 for every $2 you earn above $16,920. Many people who start Social Security at age 62 and continue to work are in for a big surprise when they find out about this rule when their Social Security benefit check is reduced or doesn’t come at all because they earned too much from other work. Once you reach full retirement age, the annual earnings test no longer applies, allowing you to earn as much as can without any reduction to your Social Security benefits. So, if you plan on working and can wait until full retirement age to start Social Security benefits, it may make more financial sense to wait until full retirement age or age 70 before starting your Social Security benefits. When younger than your full retirement age, it is important to consider whether or not you really need the Social Security income right now. If not, you may be better off waiting to take your Social Security income benefit.
Also, if you continue to work, you continue to pay into Social Security. If you don’t need your Social Security income before full retirement age, you could be increasing your average indexed monthly earnings which would provide you a larger benefit at full retirement age.
If I am married and pass away before my spouse, what survivorship benefit will I be leaving for my spouse?
Survivorship benefits is an often neglected benefit of Social Security income. When one loses a spouse, the surviving spouse has the option to continue their own Social Security benefit or switch to their deceased spouse’s benefit; whichever is greater. When there is a difference between Social Security benefits between spouses, it is important for the spouse with the higher benefit to understand the needs of their spouse should the higher benefitted spouse pass away first. The longer the higher earning spouse can wait to start their own benefits, the larger the survivor benefit will be to their spouse. In many cases, this means the higher-earning spouse should try to delay taking their benefit until age 70 to create the highest survivorship benefit they can for their spouse.
How long do I think I (and my spouse) might live after starting Social Security benefits?
If we only had an expiration date on our birth certificates answering this question would make our decision when to start Social Security benefits easy. Although our longevity is unknown to us, there are clues we can consider to gain some insight into what we might expect for our own longevity. First, we are all living longer statistically. Things that “did us in” 50 years ago are treatable today. It is likely no matter what might ail us today, we will have more longevity and better life quality than someone with those same ailments 50 years ago. Second, evaluate your own lifestyle. Are you living a healthy lifestyle which includes exercise, eating healthy, social engagement, sense of purpose, spiritual foundation, etc.? The way we live today will have a lot to do with not only our longevity, but our quality of life. Third, consider your genetics. If your parents or other relatives were blessed with long lives, the chances are good you will be too. Have you planned for it? As you connect the dots you might learn you should expect longevity. If you believe you will live longer than roughly 80-82 years of age, delaying your Social Security to age 70 likely makes the most sense.
Given my circumstances, when is the optimal time for me (us) to start our Social Security benefits?
This is the most important question to ask and answer before starting your Social Security benefits. Answering this question accounts for all of the previous questions asked in this article and those unasked questions you are likely thinking of right now. Answering this question requires consideration of your complete financial picture like retirement income sources, investments, things you want to be able to afford in retirement, other expenses, longevity expectations, needs of your spouse, inflation, taxes, healthcare costs, potential long-term care costs, etc. It is through understanding all of these variables and how they impact your financial security in retirement you determine when taking Social Security benefits would be optimal for you (and your spouse).
For many of us, planning for these variables is just too much for us to get our arms and minds around; yet, this decision is too important for guesswork or hoping you made the right decision. Making the wrong decision could cost you and your family hundreds of thousands of dollars over a lifetime. With so much at stake, wouldn’t it make sense to get guidance from a financial professional? You can gain valuable insight to your own situation through the collective experience and knowledge of an experienced advisor who has helped many people like you with this decision. Remember, not all advisors understand the nuances of Social Security. Make sure the advisor you choose to work with not only understands the various Social Security claiming options, but can explain to you why one option would be better than another.
At Presidential Wealth Management, our advisors have educated and helped 1000s of individuals through our workshops and one-on-one meetings. We take our clients through an in-depth analysis of their social security claiming options and how those decisions impact their short and long-term retirement income security. If you think you would benefit from this analysis, please visit our website and request a Discovery Session with one of our financial advisors.