Spend some time researching Social Security and you'll find a lot of articles warning you about mistakes that could cost you some portion of your benefits. While valid, these warnings can leave you confused and uncertain about when you ought to start Social Security.
I'm going to simplify things for you a little. The only truly wrong decision you can make is starting Social Security without understanding how your benefits are calculated and how your decisions affect the size of your checks and the checks of others who are claiming benefits on your work record. So before you sign up, review the three questions below.
1. How does the age I start Social Security benefits influence my checks?
You probably know you can begin Social Security as early as age 62, but not everyone realizes that starting this early permanently reduces your checks. If you want the full amount you're entitled to based on your work record, you must wait to claim until you reach your full retirement age (FRA). This is 66 for individuals born between 1943 and 1954, and then it rises by two months every year after that until it reaches 67 for adults born in 1960 or later.
Beginning benefits before your FRA decreases the amount you receive in your monthly checks. If you start right away at 62, you'll only get 70% of the benefit you would've gotten if you claimed at your FRA of 67, or 75% of the benefit you would've gotten if your FRA is 66. Every month you delay benefits increases your monthly checks until you reach age 70 and the maximum benefit rate. This rate is roughly is 124% of what your benefit would be at FRA if your FRA is 67 or 132% of what it would be if your FRA is 66.
That doesn't mean delaying benefits is always the wiser choice. If you don't expect to live long, you'll likely get more out of the program by starting right away. But if you expect to live into your late 80s or beyond, you'll probably get more money overall by delaying benefits at least until your FRA.
2. What other factors affect the size of my Social Security checks?
Age is one of the key factors in determining how much you receive in Social Security benefits, but it's not the only one. Other factors that matter include:
- Your income over your 35 highest-earning years
- Whether you're working and claiming benefits under your FRA
- Whether you owe taxes on your benefits
Your monthly benefit is calculated using your yearly wages from your 35 highest-earning years of work. Those who claim benefits before they've worked at least 35 years will shortchange themselves because they'll have zero-income years factored into their calculation, which will reduce their benefit. Conversely, those who work more than 35 years will see their lower-earning years get replaced by their higher-earning years, raising their monthly benefit. So it pays to work longer if you can.
Starting Social Security below your FRA while you are still working can also reduce your benefits, at least temporarily. If you'll be under your FRA for all of 2020, you'll lose $1 for every $2 you earn over $18,240. If you'll reach your FRA in 2020, you'll lose $1 for every $3 you earn over $48,600 if you hit this amount before your birthday.
The good news is, this money isn't lost forever. When you reach your FRA, the government recalculates your benefit to include the money it withheld from you, so your future checks will be larger. But it might make more sense for you to delay benefits until you're ready to retire or until you reach your FRA, whichever comes first, so you don't have to worry about this.
Finally, while taxes won't directly reduce the size of your Social Security checks, they will influence how much of your benefits you get to keep. Individuals with combined incomes -- adjusted gross income (AGI) plus nontaxable interest and half of your Social Security benefits -- exceeding $25,000 and married couples with combined incomes exceeding $32,000 could owe taxes on up to 50% of their benefits. Individuals with combined incomes exceeding $34,000 and married couples with combined incomes exceeding $44,000 could pay taxes on up to 85% of their benefits. Here's a primer if you want to learn more about Social Security benefit tax.
You may not be able to avoid paying taxes on your benefits completely, but understanding how your benefits are taxed may encourage you to delay benefits until later when your income is lower.
3. How do my Social Security decisions affect my spouse?
Spouses may receive up to half of your Social Security benefit at your FRA if this amount would be greater than what they are eligible for based on their own work record. But if you start benefits early, you're also shrinking your spouse's maximum spousal benefit, and that could reduce your household benefits significantly.
You should coordinate with your spouse about when to start benefits to maximize how much you receive overall. One common strategy is for the lower-earning spouse to start benefits early (if need be), so the higher-earning spouse can afford to delay benefits. Then, when the higher-earning spouse claims their benefits, the Social Security Administration automatically switches the lower-earning spouse to a spousal benefit if this would give them more money.
There's a lot to consider when deciding when to start Social Security, but if you can answer the above questions, it shouldn't be too difficult to choose the most optimal starting age for you.