Retirement is something you could spend your entire career planning for. And one of the most important decisions you will make is when to start taking Social Security.
When you apply for this benefit will determine how much you receive monthly -- which could have a huge impact on your lifestyle. It also affects how much you get from this program over your lifetime. Here are three things you should consider before turning on your Social Security income tap.
1. How Social Security works
Your full retirement age (FRA) is based on the year you were born and is either 66, 67, or somewhere in between. If you wait until this age, you will receive your standard benefit. But you can take Social Security as early as age 62. When you take it early, your benefit is reduced. For instance, if your FRA is 66, you'll receive 25% less if you take it at age 62. You will receive increases for taking it beyond your FRA -- you'll get up to 32% more by age 70, when the boost for delayed claiming ends.
2. Your health
If your FRA is 66 and you have a standard benefit of $2,400, you would get $1,800 at 62 and $3,168 at age 70. If you live to 75, taking your benefit at age 62 would earn you $280,800 in lifetime income; you'd get $259,200 if you took it at 66, and $190,080 if you took it at age 70.
If your live 5 years longer to 80, you would get $388,800 if you started your benefit at 62, $403,200 if you applied at 66, and $380,160 at age 70. If you live to 85, you would get $496,800 in total income starting at 62, $547,200 at 66, and $570,240 by starting at 70.
Your health -- and by extension, how long you can expect to live -- is one of the most important factors in this decision. If you have a shorter life expectancy, taking payments early usually makes the most sense. The longer you expect to live, the more you gain from delaying the start of your benefit. And if you have an average life expectancy, taking it at your FRA could be in your best interest.
3. Whether you'll keep working
This matters because depending on your age, your benefit could be reduced. If you make it to your FRA, you can work as much as you want and your Social Security benefit won't be decreased. But if you apply for your benefit before FRA, you are limited in how much you can earn without seeing a deduction.
If you are under your FRA, you can earn up to $18,960 in income each year or $1,580 each month in 2021 without a cut in Social Security benefits. For every $2 you earn above that, $1 will be deducted from your check. So if you earn $2,400, for example, you will see $410 taken from your payment each month.
In the year that you reach your FRA, you get a little more wiggle room. Now you can earn $50,520 (or $4,210 each month) in 2021. And for every $3 you earn over this amount, $1 is taken away. If you make $6,000 a month, for example,, your monthly check is cut by $596 -- and this remains in effect until the month before you reach your FRA.
You're compensated in part for forfeited benefits, because for every month's worth of benefits you lose, you're treated as having claimed your benefits a month later than you actually did. That will eventually boost your monthly payment, returning a portion of what you've given up.
Unless you absolutely need the money, though, planning on working and not filing for benefits until you reach your FRA can ensure that you won't have to worry about losing any of your Social Security payments. If you need both incomes, making sure you stay below the limits could help make sure you get the highest benefit amount possible.
How much do you need the money?
When you start taking Social Security may ultimately come down to need. If your spouse is still working and can cover your expenses, or if you have a pension, it could also make delaying it more possible. But not having any of these income sources to draw on -- or enough saved -- may determine when you apply for your Social Security benefit.
If you can work as long as possible, you could avoid taking it early, but an unexpected expense or event could derail those plans. And in that situation, Social Security may be a lifeline to help pay your bills.
When to turn on your Social Security income stream is a big decision. And while there may be an optimal time, other factors that you can't control could affect your choice. So planning for what you can control -- while being flexible with the things you can't -- will help you get the most out of this benefit.