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3 Considerations in Deciding When to Take Social Security

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One of the biggest decisions you'll face as you near retirement is when to start collecting Social Security. It's important to understand your options and the effect they can have on your retirement. Let's first address some of the basics of Social Security. Then we'll get into the specific considerations you must face in deciding when to start reaping your benefits.

A few basics
With Social Security making up roughly 40% of an average retiree's income, it's important for you to make a smart decision as to when you start collecting your benefit. Your choice is a personal, complex one that only you can make.

But there are several generalities about Social Security benefits. For example, monthly benefits are based on your highest 35 years of earnings (adjusted for inflation) and the age you start collecting benefits. The more money you made in your working years and the longer you delay taking Social Security, the higher your benefit.

Benefits are reduced by up to 25% if you claim at age 62, as opposed to your full retirement age. Meanwhile, benefits are increased by up to 32% -- roughly 8% per year -- if you delay taking benefits until age 70.

A big decision
Carefully examine these three factors to help you determine when you should start collecting your benefit.

1. Life expectancy
Most consideration around Social Security hinges on a breakeven date. That refers to the date when individuals who wait to collect larger benefits overtake those who took smaller benefits early. For most folks, that date falls somewhere in your late 70s or early 80s.

If longevity isn't in your genes, your life expectancy may not exceed your breakeven date. In that case, collecting benefits early could give you more money than waiting for larger benefits that you'll potentially not be around to collect.

However, keep in mind that, on average, a man who turns 65 these days is expected to live an additional 20.5 years. A 65-year-old woman is expected to live an additional 22.7 years. So odds are, if you're in at least average health and have parents who lived into their 80s and 90s, you can chalk one up in the delaying-benefits column.

2. Income needs
Naturally, delaying your benefit assumes you have income to bridge the gap between age 62 to full retirement age, or even up to age 70. If your savings are insufficient to pay for your income needs, then, by all means, collect early. But if you have sufficient income-producing assets or wages from continued employment, then strongly consider delaying your benefit. Keep in mind that you're still Medicare-eligible at age 65, regardless of what age you start collecting Social Security.

3. Spousal considerations
Benefit calculations become much more complex if you're married. If you take benefits early and receive a permanent reduction, your spouse's survivor benefit will also be permanently reduced, which could have a major effect on your spouse's income after you pass away. Some spousal claiming strategies include "file and suspend" and claiming a spousal benefit now and your own benefit later. Make sure you think through how your decision will affect your family members.

Foolish final thoughts
When to start receiving Social Security benefits is not a decision to be taken lightly. It shouldn't be based solely on what your brother-in-law or best friend is doing. Since everyone's situation is different, be sure to evaluate what's best for you and your loved ones in making this critical decision.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Learn about The Shocking Can't-Miss Truth About Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.

Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2013, at 1:41 PM, greyhound44 wrote:

    Of course, it's easier to make the decision if one is single - many more facets if one is married.

    I retired after having "contributed" MAX FICA at age 58 3/4 in Aug 2003. None since.

    Took MAX SS retirement benefits (reduced for age) at 62, and MC at 65.

    Last paid property taxes (ex US$137.23 on my time share condo in Solana Beach, CA for 2011 and 2012) in 2004, and no US income taxes since 2007.

    ret expat MD

  • Report this Comment On April 14, 2013, at 3:05 PM, toomuchgas wrote:

    One issue that no one mentions is the tax rate of those receiving SS. If you are in a higher tax bracket it might be better to take it at 62 at a lower rate so you don't have to pay the Obamacare tax surcharge. Also, expect SS to be means tested soon.

  • Report this Comment On April 14, 2013, at 4:04 PM, MinnesotaGlen62 wrote:

    3 considerations? Ok

    1st- I am going on 62

    2nd- I may drop dead at anytime

    3rd- I want to get it while I can since I have worked all my life

  • Report this Comment On April 14, 2013, at 5:47 PM, mrspaceman007 wrote:

    4th consideration: take it now since it will cease to exist in a few years with Obama at the helm!!!

  • Report this Comment On April 14, 2013, at 10:57 PM, MCCrockett wrote:

    Social Security income is subject to Federal Income Tax but not subject to the Additional Medicare Tax.

    I'm not sure why one would recommend that Social Security be taken early to avoid a non-existent tax.

  • Report this Comment On April 15, 2013, at 1:12 AM, VeronicaDaze wrote:

    If your only retirement amount is Social Security you will most likely pay no income tax. You have already paid. It is when some work as well that they have to pay and if they go over the top amount before the age of full coverage, then they take so much off what you get in Social Security the next year.

    I have been on Social Security for four years and haven't paid any sort of extra tax. I do pay for Medicare but that has only been a little over a year and it went up four dollars and that is all. I actually could get it free but haven't applied for it. Most won't live for years and years and if working becomes a hardship, you should collect early. Taxes only apply for those that have other income and what it is. I basically own nothing, don't have a car and no extra income. I am below poverty level and I only get along (barely) because I live with family.

    My husband was younger and died before he was able to collect but I now get widow's benefits and so I have a reasonable income. Before it was less than $600.00 a month. Don't think early retirement means getting a lot of money. It is decided by what you have earned. I never had high paying jobs even with college. My brother who had no education made more than I did. I had no choice because of the economy and my age I wasn't getting work, so I retired.

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