Social Security comes with a simple rule: The longer you wait between ages 62 and 70 to claim benefits, the bigger your monthly payments will be. The obvious trade-off is that if you claim late, you'll get fewer of those larger monthly payments over the course of your lifetime, and so you have to decide what's more important for you. The majority of Americans decide to take benefits early, preferring a bird in hand to two in the bush. But there are some situations in which waiting until age 70 to claim retirement benefits makes a lot of sense, and you'll learn more about three of them here.
Reason 1: You get a public pension
Some workers are fortunate enough to have both Social Security benefits and pension benefits from a public-sector job. That opens the door to two income streams in retirement, which is becoming increasingly unusual. However, it also leaves you subject to the terms of the Windfall Elimination Provision, under which the Social Security Administration can take away some of your Social Security benefits.
The idea behind the Windfall Elimination Provision is that because Social Security calculates your benefits based on average compensation over your 35-year career from jobs in which you paid Social Security payroll taxes, government job earnings that aren't subject to those payroll taxes skew your overall average. Even though having years of earnings that weren't subject to Social Security taxes will cut your benefit, the progressive nature of Social Security benefits mean that they won't get cut enough to be fair in the government's eyes. The calculation of the WEP is complicated, but your Social Security can be cut by as much as half your public pension.
Image source: Getty Images.
In some cases, the WEP would represent such a huge hit that if you claimed Social Security benefits early, the provision would wipe out your monthly Social Security payment entirely. By waiting until age 70, you might be able to preserve at least part of your benefit. It's important to run the numbers and see how you end up depending on when you claim.
Reason 2: You don't want your benefits to get taxed
One thing that many people who claim their Social Security early find is that their benefits can be subject to tax. If your non-Social Security income plus half your Social Security benefits add up to more than $25,000 for a single person or $32,000 for a joint-filing couple, then at least a portion of your benefits can become subject to tax.
Early in retirement, the odds are better that you'll have higher income from outside sources. If a spouse is still working, then it can be extremely difficult to avoid taxation on the other spouse's Social Security benefits. Even if both spouses in a couple are retired, taxable distributions from IRAs, 401(k)s, and other retirement accounts can push you into the zone in which your Social Security is subject to tax. If you wait until 70 to take benefits, then they might escape taxation entirely, potentially putting thousands of dollars back in your pocket.
Reason 3: You want your family to get maximum survivor benefits
Some retirees only need to worry about their own retirement benefits because they have no other family member who's eligible to claim benefits on their work record. However, if you do have a spouse or child who would be eligible for survivor benefits, then waiting to claim until 70 can maximize what they receive as well.
Survivor benefits are calculated as a percentage of what the deceased worker received from Social Security. Therefore, if you wait longer and max out your own monthly benefit, it will also have the consequence of boosting survivor benefits as well. In some cases, that can make what might look like a poor decision just from your perspective a much better choice from the viewpoint of your entire family.
When to take Social Security benefits is a key decision that nearly every working American will have to make. By keeping factors like these in mind, you'll be better able to make the best choice for your particular situation.
