When to Start Taking Social Security

One of the most important considerations in retirement planning is deciding when to start receiving your Social Security retirement benefits. Getting the timing right is critical to maximizing the benefits accrued during a lifetime of work. Far too many people remain unaware that claiming Social Security early surrenders up to 30% of potential benefits. Moreover, couples deciding to take Social Security at 62 can amplify the impact of early receipt. If both you and your spouse file for early benefits, you both will receive less for the remainder of retirement.

Factors such as cash needs, retirement age, and life expectancy can influence your decision to claim early Social Security benefits. However, for most individuals, building a comprehensive strategy around other savings vehicles affords a later start of Social Security benefits and maximizes total retirement income. In this article, we will take a closer look at what Social Security is, the benefits that it offers, and factors to consider when determining if the time is right to start drawing Social Security.

What is Social Security?

President Franklin D. Roosevelt signed the Social Security Act into law in 1935. Program creators intended to provide retirees with a source of income once they become too old to continue working. Today, a worker pays into Social Security each year as part of his or her payroll taxes. The employer also matches personal contributions. These amounts total 12.4% of an individual’s annual income.

Once you reach the age of 62 you become eligible to begin drawing upon Social Security. However, as we will cover in this article, filing before your full retirement age can lessen your benefit amount significantly. Additionally, if you choose to delay taking Social Security until after your initial eligibility date you gain an increased payment.

In addition to the age at which you start drawing on your Social Security, your eligibility amount is contingent upon what you contributed to Social Security over the course of your career. In 2017, the average Social Security payment for a retiree was $1,391 a month. Meanwhile, the maximum amount that an individual retiree could receive from Social Security was $2,687 a month.

Benefits of Social Security

Aside from providing a stable source of retirement income, there are several other key benefits to Social Security. These benefits include:

1. Required Retirement Savings

Since contributing to Social Security is required, it is a form of retirement savings that everyone can rely on regardless of alternative savings options. While a comprehensive retirement plan should extend beyond expected Social Security benefits, the program still serves as a crucial safety net for Americans.

2. Benefits for Widows and Widowers

If your spouse passes away you are entitled to his or her Social Security benefit. There are currently about 5 million widows and widowers receiving spousal benefits in this way. If your spouse receives more in Social Security than you and passes away, being able to continue receiving that higher payment can be a key benefit. However, it is important to note that you can draw upon your Social Security or your spouse’s, but not both.

3. Additional Money for Low-Income Workers

The more you pay into Social Security, the more you can withdraw. However, Social Security still provides an advantage to lower-income workers. This is because benefits are calculated in such a way that there is essentially a minimum payment amount. Beneficiaries must earn at least $5,280 a year for ten years to gain eligibility.

Full Retirement Age & Early Benefits

In 2018, 62 is the minimum age to begin drawing Social Security. However, if you begin drawing at 62, you can forgo up to 30% of your benefits.  To receive the maximum benefit, you must wait until full retirement age. The chart below illustrates how to identify your full retirement age.

If you elect to start receiving Social Security before full retirement age you receive a permanent reduction of benefits. If you claim benefits up to 36 months prior to your full retirement age, the penalty amounts to five-ninths of 1%, per month. For example, if your full retirement age is 67 and you elect to retire at 65, you will receive a 13.3% reduction in monthly benefits, or 86.7%, for the duration of your retirement (24 months times 5/9 times 1%).

If benefits are claimed more than 36 months early, there is an additional reduction of five-twelfths of 1% for each month beyond the first 36. For example, if your full retirement age is 67 and you opt to receive your benefits at age 62, your benefits will be permanently reduced by 30% (36 months times 5/9 times 1%, plus 24 months times 5/12 times 1%).

In contrast, delaying taking Social Security until after you reach your full retirement age entitles you to a credit of 8% above your baseline amount, for each year you delay until age 70. For individuals in good health, this can amount to decades of higher payments just for delaying four years. The chart below highlights the effects of early and delayed claiming on benefits for individuals born after 1960. 

Factors to Consider

Take at least three factors commonly into consideration when deciding the age to start taking Social Security benefits:

1. Cash Needs

If you still maintain employment or have other sources of retirement income (e.g. pension, 401K, IRA, investments, etc.) that allow you to meet your financial goals, you should consider a delay in filing. Additionally, if you are still working and have yet to reach full retirement age, filing for early Social Security will result in a temporary reduction in benefits. However, if you need the Social Security income to cover expenses in your 60s you may have no other option.

2. Health & Life Expectancy

Whether you come out ahead financially from taking Social Security early comes down to how long you receive benefits. People waiting until full retirement age receive larger checks, but for shorter periods of time. The Social Security Administration has several online calculators that can help you estimate your potential benefits.

The point at which the finances tip in your favor is the break-even age. This age differs for everyone depending on taxes, investment options, inflation, and other factors. But in general, the break-even point between early retirement at 62 and full retirement at 66 occurs around age 78. If you expect to live into your 80s, you can earn more lifetime Social Security benefits by waiting to file.

3. Spousal Options

Explore ways to maximize your benefits if you and your spouse are both covered by Social Security. It may make sense for the lower-earning spouse to file for benefits at age 62. This option is particularly attractive when there are large differences in income history. Potential surviving spouse benefits should also be considered, depending on when someone initiates benefits. Finally, Congress recently prohibited the “file and suspend” tactic where a married retiree files and suspends benefits until later. However, you should still discuss the remaining spousal benefit strategy options with a financial professional prior to early filing.

Final Thoughts

Generally, retirees should delay drawing Social Security until full retirement age if financially stable and in good health. For many Americans approaching retirement, holding off for just a few years makes a huge difference.  One decision can impact whether you receive 124% of your entitled benefit or just 70% of what you have earned.

This point gains importance when you consider that if your spouse passes away you receive only the higher benefit. If both of you elect to draw Social Security before full retirement age, the benefits that you receive when you both are still alive as well as when one of you passes away will be permanently reduced.

In the end, everyone’s situation is unique. Some may choose to start taking Social Security as soon as they hit 62 because of the factors outlined above. However, for most individuals, building a comprehensive retirement strategy will maximize total retirement income. A financial planner can help you evaluate your personal situation, define your retirement lifestyle, and provide the direction you need.