As you approach retirement, one of your key decisions will be when to begin receiving Social Security benefits. It is not an easy call, and the answer usually depends on your personal circumstances. Retiring early means more payments since you are starting to receive them sooner, but a smaller check each month for the remainder of your life. Unfortunately, there is no “one size fits all” answer to when you should start receiving Social Security benefits. The sliding scale used to calculate benefits, which pays a smaller monthly amount if you retire “early” and more if you wait longer, depends on the year you were born. Your lifetime payout depends on how long you live. The first step is to visit www.ssa.gov/planners/calculators.html and find out when you’re entitled to receive full benefits, and how much those benefits will be.
Keeping your projected benefits in mind, there are three basic timing methods provided by the Social Security Administration (SSA) to consider for planning purposes; early retirement, normal or “full” retirement, or late retirement.
- Early retirement: You are eligible to begin receiving Social Security retiree benefits as early as age 62. However, you will receive a reduced benefit if you retire before the normal age for receiving full benefits. For example, if you retire at age 62, your benefit will be about 25% lower than it would be if you wait until you reach your full retirement age.
- Full retirement: The full retirement age is 66 if you were born between 1943 and 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67.
- Late retirement: You may choose to keep working beyond the normal retirement age to receive greater retirement benefits or delay your application for retirement benefits. If you are considering late retirement, keep in mind that each additional year you work adds another year of earnings to your Social Security record. Higher lifetime earnings may provide greater benefits to you in retirement. In addition your benefit will increase automatically by a certain percentage from the time you reach your full retirement age until you start receiving your benefits or until you reach age 70. The percentage varies depending on your year of birth. The maximum delayed benefit you may receive is 132% of your regular benefit amount.
The social security timing decision gets a bit complicated if you expect to claim benefits based on your spouse’s earning record. Typically, a spouse who has not worked, or one who has had low earnings, may receive up to one-half of the other spouse’s full benefit. If you are eligible to receive both your own retirement benefits and spousal benefits, your own benefits are paid out first. However, if your benefits as a spouse would exceed your own retirement benefits, you may receive a combination of benefits equaling the higher benefit.
Other special rules may apply for widows and widowers, divorced spouses, and those entitled to receive disability benefits. You can find more information on these topics by visiting the SSA Web site at www.ssa.gov.
How can you maximize your benefits?
- Have 35 credited working years- Social Security payments are based on the earnings from your 35 highest income years. If you have not worked for 35 years, every year you didn’t work will reduce your benefits. To avoid having years with zero earnings that reduce your benefit amount, consider working a few extra years to raise your lifetime income average.
- Delay receiving benefits- If you can afford to do so, and if you anticipate having a longer life expectancy, delaying receipt of your benefits may increase your lifetime payout.
- Claim spousal benefits- Spouses (and ex-spouses) who were married for at least 10 years are eligible to claim not only their own benefits, but spousal benefits as well. Take advantage if claiming spousal benefits increases your or your spouse’s benefit amounts.
- Consider a side job- Padding your income in the final couple of years before receiving benefits can bump up your 35-year income average. This will result in a larger payout amount.
- Manage your tax liability- Up to 85% of your social security benefit may be taxable depending on your retirement income. “Income” means your adjusted gross income plus non-taxable interest income plus half of your Social Security benefits. If over certain income limits, 50% to 85% of your social security benefit will be taxable. Some states also tax social security benefits. Managing your retirement income may reduce the amount of your benefit that is taxed.
- Collect survivor benefits- If you are aged 60 or older, you can receive a deceased spouse’s or deceased ex-spouse’s Social Security benefits if the benefit you are entitled to is higher than what you’d receive based on your own earnings. You may have to wait until reaching your full retirement age to claim 100% of the survivor benefit.
- Choose your own path- It may be tempting to choose the same strategy as a family member, friend, or neighbor. However, it is important to sit down and work out the path that will result in receiving the largest possible benefit based on your unique circumstances.
Ultimately, regardless of the strategy chosen, your decision will likely have to be fully coordinated with your overall personal retirement and financial plan.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at email@example.com.
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