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When it comes to collecting your Social Security…  it can pay to wait.

When it comes to collecting your Social Security… it can pay to wait.

| April 02, 2024

Social Security is a critical financial cornerstone for many retirees.  Understanding how and when to collect your benefits can significantly impact your overall financial well-being. Here's a breakdown of key factors to consider before making this important decision.

Most people look forward to the day they can start receiving their Social Security benefits, but not everyone should jump at the first available opportunity. The age at which you start collecting Social Security can make a big difference in how much you ultimately collect.


Let’s look at the various retirement ages and the benefit amounts associated with them…


Full Retirement Age (FRA) — This is when you're eligible for your full retirement benefit. If you were born between 1943 and 1954, your FRA is 66. If you were born in 1960 or later, its 67. FRA goes up in increments of two months for birth years between 1954 and 1960.

Impact of Early Retirement — You can receive benefits as early as age 62, but they'll be permanently reduced. Claiming benefits at 62 means your monthly benefit could be reduced by up to 30%, depending on your FRA. This reduction is permanent, impacting your income for the rest of your life. Early retirement might be suitable if you have health concerns or need immediate income, but it’s important to carefully consider the long-term financial implications.

Delayed Retirement Credits — The longer you wait to claim benefits past your FRA, the higher your monthly payout becomes. For each month you delay, you earn delayed retirement credits that increase your benefit by up to 8% annually until you reach your full retirement age. But you have the option of waiting even longer until you reach age 70, which yields the highest payments. This strategy maximizes your monthly income but requires delaying access to those funds.


Now let’s review some of the factors you should consider to help you decide which retirement age is best for you…


Financial Health — Consider your current and projected retirement income excluding Social Security. If you have a robust pension, substantial savings, or plan to continue working part-time, you might have more flexibility to delay claiming benefits. Conversely, if you have limited savings and need the income stream sooner, early retirement might be more attractive.

Work Status — If you plan to continue working and start receiving Social Security benefits before reaching your full retirement age, there are important considerations to keep in mind. Receiving a paycheck alongside Social Security benefits could result in surpassing the annual earnings limit. If your total income exceeds this limit, your Social Security benefits will be reduced. The reduction amount varies based on your age. Generally, for every $2 earned above the limit, your Social Security benefits are reduced by $1.

Once you reach your full retirement age, the annual earnings limit no longer applies. However, it's crucial to note that your Social Security benefits may still be subject to taxation. Up to 85% of your Social Security benefits could be taxed, depending on your total income and filing status. Given these factors, if you're still working when you become eligible to start receiving early benefits, it might be wise to delay taking benefits until your income decreases or until you reach full retirement age.

Health — Life expectancy significantly affects this decision. If you anticipate a shorter lifespan, receiving benefits earlier might be prudent.  However, if you expect to live a long life, delaying benefits could provide a more substantial income stream over a longer period.

Spousal Benefits — If you're married, your spouse's benefits can also influence your decision. You might strategically time your application to maximize the combined household income. The Social Security Administration (SSA) offers benefits calculators that consider spousal benefits: https://www.ssa.gov/OACT/quickcalc/spouse.html.


Additional factors to consider…


Cost-of-Living Adjustments (COLAs): Social Security benefits are adjusted annually for inflation. While this helps maintain purchasing power, it might not fully keep pace with rising healthcare costs.

Taxes: A portion of your Social Security benefits may be taxable depending on your overall income.



Making an Informed Decision

Choosing when to collect Social Security is a personal decision. Carefully consider your financial needs, health status, and retirement goals. By taking the time to understand your options, you can make an informed choice that maximizes your Social Security benefits and strengthens your overall retirement plan.

 

Contact us to speak with one of our advisors to review your options.



This material is being provided for general information and educational purposes only and should not be construed as investment, tax, accounting, or legal advice, or used as the primary or final determinant of the best strategy on how and when to claim Social Security benefits. It is strongly recommended that each individual meet with a Social Security representative who can address his/her specific situation. A wealth of information, including interactive calculators, can be found at the Social Security Administration’s website: http://www.ssa.gov/pgm/retirement.htm.

Resources

The Social Security Administration website offers a wealth of resources to help you navigate your benefits. Here are some valuable tools:

Retirement Benefits Planner: This interactive tool helps estimate your benefits based on your earnings history and retirement age: https://www.ssa.gov/benefits/retirement/planner/agereduction.html.

When to Start Receiving Retirement Benefits: This resource provides a detailed overview of the trade-offs between claiming benefits early or delaying them https://www.ssa.gov/pubs/EN-05-10147.pdf.