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.
