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On the cusp of claiming your Social Security benefits? Congratulations -- if you're like the average American, you'll have lots of time to share with family and friends while pursuing your most passionate interests. In order to help make sure you've got Social Security working for you, there are three very important things you need to consider before claiming your first benefit check.
1. The longer you wait, the more you'll get
Most soon-to-be retirees already know this, but it's so important that it's worth stating again and again and again. You can claim your first Social Security check as early as 62 (though that will be changing soon), or as late as 70. With each year you wait, your potential payout increases up to an 8% clip.
Let's assume your inflation-adjusted earnings during your career averaged $60,000. Here's how your monthly benefit changes, depending on the age at which you start to claim.
|
Age |
Monthly Social Security Benefit |
|---|---|
|
62 |
$1,570 |
|
63 |
$1,680 |
|
64 |
$1,820 |
|
65 |
$1,960 |
|
66 |
$2,100 |
|
67 |
$2,260 |
|
68 |
$2,430 |
|
69 |
$2,600 |
|
70 |
$2,770 |
Data source: Author's calculations. All figures rounded to the nearest $10.
Of course, there's a trade-off as well. The person who claims Social Security at age 62 has eight years worth of benefits accumulated before the person who waits until age 70 receives his first check.
There are ways to measure where the absolute benefits meet. For instance, the chart below shows lifetime benefits for someone who claims at 62 versus 70 (at the levels listed above).
Surprisingly, it only makes perfectly "rational" sense for this person to wait until 70 to claim Social Security if she believes she'll live to be 94.
Most people, however, weight their own personal circumstances far more than any specific graph like the one above. You should do the same.
2. Taxes and provisions of your Social Security benefit
You can still receive Social Security benefits if you're working. However, if you're under the full retirement age (66), your benefits can be reduced. If your provisional income is more than $15,720, then for every $2 over that amount, your benefits will be reduced by $1. The good news is that once you reach full retirement age, that money will be added back into your future benefits.
Let's use an example of Walter the Worker. He is 63 and earns $20,720 per year. His Social Security benefit is supposed to be $18,860 per year. However, because he is earning $5,000 over the cut-off, his benefits will be reduced by $2,500. Thus, he'll get $16,360 from Social Security for the year.
The other scenario to be aware of is the one in which your Social Security benefits can be taxed:
- On the federal level, up to 50% of benefits are taxable if a couple earns income over $32,000 per year ($25,000 for individuals). If a couple earns over $44,000 ($32,000 for individuals), then 85% of benefits are taxable.
- On the state level, there are 13 different states that tax Social Security benefits.
3. Coordinating with your spouse
To understand the importance of coordinating benefits with your spouse, you need to put yourself in one of two camps. In the first camp, one spouse (to match data and make it easier to understand, we'll say the wife) earned so little during her working life that her benefit will be less than half of her husband's. In the second camp, the wife earned enough so that her benefit will be more than half of her husband's.
If you're in the first camp, the wife will need to wait until the husband claims his own Social Security benefits before she can claim spousal benefits. In this case, the wife gets 50% of the husband's benefit. It's worth noting that once the husband reaches full retirement age, spousal benefits stop increasing. In other words, if the husband waits until 70 to claim, his wife will only receive 50% of what his benefits would have been at age 66.
If you're in the second camp, there's more wiggle room. In general, it makes the most sense to have the wife claim as early as possible, and for the husband to wait as long as possible. This helps offer a revenue stream starting at 62, while allowing for bigger payouts at age 70. This becomes particularly important if the husband passes away, because the wife assumes the husband's benefit -- and by waiting until age 70, that benefit is substantially higher.
At the end of the day, the most important variables for you to consider before claiming Social Security benefits will be unique to your own life situation. Be sure to consider when to claim, how it will affect your spouse, and the potential tax consequences before making a final decision.
