Millions of Americans will become newly eligible for Social Security in 2021, but being eligible isn't the same as being ready to claim. If you want to get the most money from the program, you need to make an educated decision about when to sign up that's grounded in an understanding of how your Social Security benefits are calculated. Below are three signs that you're ready to begin Social Security this year.
1. You know how your age affects your checks
Age is one of the most significant factors in determining the size of your Social Security checks and your lifetime benefit. You can start receiving Social Security as early as 62, but if you want the full benefit you've earned based on your work record, you must wait until your full retirement age (FRA). That's 66 or 67, depending on your birth year.
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Starting benefits before your FRA reduces your checks. Those who begin right at 62 will only get 70% of their scheduled benefit per check if their FRA is 67, or 75% if their FRA is 66. Every month you delay benefits increases your checks slightly until you hit your maximum benefit at 70. That's 124% of your scheduled benefit per check if your FRA is 67, or 132% if your FRA is 66. You can learn more about how much you'll receive per month at various starting ages by creating a my Social Security account.
If you expect to live into your mid-80s or beyond, it makes sense to delay benefits if you want the most money overall. But you also have to consider your financial situation when deciding when you should sign up for Social Security. If you need your checks to cover your living expenses, you may have to start earlier even if it means a smaller lifetime benefit.
2. You understand how claiming could affect your tax bill
You could owe taxes on your Social Security benefits if your combined income is high enough. This is your adjusted gross income (AGI) plus any nontaxable interest and half of your Social Security benefits. Single adults with combined incomes exceeding $25,000 and married couples with combined incomes exceeding $32,000 could owe taxes on up to 50% of their benefits, while single adults with combined incomes exceeding $34,000 and married couples with combined incomes exceeding $44,000 could owe taxes on up to 85% of their benefits. Some states tax Social Security benefits as well. Here's a primer if you're interested in learning more.
Social Security benefit taxes aren't always avoidable, but it's important that you recognize the possibility and prepare yourself so you're not hit with a surprise bill. If you're worried about owing taxes on your benefits, you may be able to reduce these odds by delaying benefits until you've stopped working or by withdrawing more money from your Roth savings, as this doesn't affect your AGI or combined income.
3. You've talked it over with your household members
When we think of Social Security benefits, we often think of those we've earned from our years in the workforce, but spouses, ex-spouses, and dependent children of retired workers can also be entitled to benefits based on your work record.
Coordinating with your spouse and any dependents who may be able to claim Social Security benefits in your name is crucial for getting the largest household benefit possible. The best solution will depend on your personal situation.
In households where both spouses earned a fairly equal amount over their lifetimes, it makes the most sense for both to delay benefits as long as possible if they want the largest lifetime benefit. But in households where one spouse earned significantly more than the other, a common tactic is for the lower-earning spouse to claim benefits right away at 62, if necessary, so the higher-earning spouse can delay Social Security until 70 when they get their largest possible benefit. When signing up, the Social Security Administration will automatically switch the lower-earning spouse to a spousal benefit if this would give them more money.
If you've thought over the three questions above and still believe now is the best time to start Social Security, go for it. But if after reviewing the above list you're unsure whether you should sign up this year, consider holding off a little longer if necessary.
