One of the most asked questions near-retirees have about Social Security is when is the best time to start collecting benefits. Even though many may assume that putting off your benefits as long as possible is more beneficial to maximize your Social Security benefit, this is not always correct. Instead, the optimal solution depends on a person’s unique financial situation, health, and retirement plans.
Here’s what to know about how Social Security works and why someone would claim their benefits early or later.
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How Does Social Security Work?
Social Security retirement benefit is based on your lifetime earnings. Therefore, the higher your earnings, the higher your benefits will be. However, there’s a catch. Social Security will not tax your taxable income over $147,000. This amount is known as the “maximum taxable earnings” and changes yearly.
As you pay Social Security payroll taxes, you can earn four credits per year by at least making $6,040 per year. You must earn at least 40 credits over ten years to qualify for benefits. Your benefits are based on the 35 years in which you made the most amount of money. If you haven’t worked for 35 years, zeros will be added for those non-working years, which will lower your payout. Social Security averages your monthly earnings to estimate your benefit amount.
You may start collecting benefits as early as 62. However, your benefits will be reduced if you start collecting before your full retirement age, either age 66 or 67. For example, if you take your benefits at age 62, you will get 30% less benefit per payment than your full retirement age. Here are several things to consider before deciding when to start collecting your Social Security benefits.
Reasons to Claim Social Security Early
Get Out of Debt
If you have difficulty paying off high-interest debt, consider collecting payments sooner. Compound interest from high-interest loans can cause more harm than collecting Social Security later. Before you start collecting Social Security to pay off your debt, compare the debt interest rate and your projected Social Social benefit.
Need Extra Income
If you have experienced a financial emergency, like a layoff or a significant expense, and you are at least 62, it may be reasonable to take benefits early. You can also use the funds to launch your next phase in life, like a new business or change of lifestyle, then utilizing Social Security can give you more flexibility. In addition, you can repay your Social Security within the first year without penalty if you don’t need the extra money.
If you are experiencing severe health problems or have a family history of premature death, taking Social Security early will allow you to collect as many monthly benefit checks as possible. On the other hand, if you foresee an above-average life expectancy, delaying your benefits might be more beneficial. If not, consider claiming your benefits earlier.
Your Social Security benefits are guaranteed to increase by 8% per year for each year you delay between your full retirement age and age 70. If you can beat an 8% yearly return by investing your benefit proceeds, then claiming your benefits early is a good option. Be aware that your Social Security benefits are guaranteed to increase over time; however, an investment could decline in value. Therefore, counting on higher returns incredibly close to retirement is unwise.
Married women can be excellent candidates for claiming an early benefit because they are likely to outlive their spouses. Widows then become eligible to receive the higher of either their benefit or their spouses. Therefore, if you are a married woman with less Social Security than your spouse, you might consider having your spouse delay their benefit to leave a more considerable survivor’s income for you.
Reasons to Start Collecting Social Security Later
As discussed earlier, if you wait until your full retirement age, Social Security will add an 8% retirement credit to your monthly benefit until age 70. That’s more than you will receive with most fixed products.
Health Insurance Coverage
Your health insurance coverage can have a role in deciding when claiming your Social Security benefits. For example, if you have a health saving account (HSA) that you would like to continue to contribute to, you will not be able to continue to contribute to the account if you sign up for Medicare Part A. Therefore, to avoid Medicare penalties and automatic enrollment, don’t claim Social Security; instead, receive health insurance through you or your spouse’s employer.
If you plan to work while receiving Social Security benefits, consider waiting until your full retirement age to claim benefits. If you earn a high income from your job, you may temporarily lose some of your benefits or be required to pay more in taxes.
When to Claim to Maximize Your Benefit?
To maximize your Social Security payout, complete a break-even analysis to determine when you should start receiving benefits. A break-even age occurs when the total value of benefits from postponing Social Security starts to exceed the total value of getting benefits early.
For example, if you are eligible to collect a $10,956 yearly benefit at 62, you would receive $16,608 yearly in benefits if you wait until full retirement age or $21,312 yearly at 70. Based on how long you suspect yourself to live
- If you start taking benefits at 67, you will need to survive until 77 to collect more money than someone who began receiving benefits at 62.
- If you start taking benefits at 70, you will need to survive until 81 to collect more money than someone who began receiving benefits at 67.
A break-even calculator can be an additional tool to weigh against the other factors above to help you decide the best time for claiming Social Security.
Every financial situation is unique, and there are many factors to consider when deciding when you should receive Social Security; here are some general guidelines to help you make your decision:
Consider taking your benefits early if you are:
- No longer working or have difficulty making ends meet
- In poor health and don’t expect your surviving spouse to live longer than the average life expectancy
- A higher-earning spouse that can wait to file later
Consider delaying your benefits if you are:
- Working and making enough to cover your living expenses
- In good health and estimate that you will exceed the average life expectancy
- A higher-earning spouse and want to ensure that your spouse gets the highest survivor’s benefit possible.
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Danielle Miura, CFP®, is the founder of Spark Financials, a life and financial planning firm specialized in helping those planning for retirement to organize, simplify, and empower them through every life turn. As a CERTIFIED FINANCIAL PLANNER™ professional, I help my clients protect their assets, manage their wealth, and dream about their future.