Seniors have a number of tough decisions to make during their golden years, but few could have larger ramifications on their financial well-being than deciding when to file for Social Security benefits.
Based on a recently released analysis from the Social Security Administration, 61% of beneficiaries are receiving at least half of their monthly income from Social Security, including 48% of elderly married beneficiaries and 71% of elderly unmarried individuals. A misstep in deciding when to claim benefits can prove costly, and, for people relying on this income, make it difficult to make ends meet.
Making matters even more complicated is the fact that the Social Security program is destined to burn through its more than $2.8 trillion in spare cash by the year 2034 based on the latest report from the Social Security Board of Trustees. Should Congress fail to act and find new ways to increase revenue to the program, an across-the-board benefits cut of up to 21% may be needed to sustain Social Security through the year 2090.
In short, choosing when to file for benefits is becoming more important by the day.
So when is the best time to file for Social Security, you may wonder? The answer often depends on your answer to the following questions.
Do you have alternative income sources?
Arguably the biggest difference between filing for Social Security early and filing later is whether or not you have alternative income sources during retirement. In other words, do you have money saved that you can rely upon in your 60s that could allow your Social Security benefit to grow by approximately 8% per year until it maxes out at age 70?
One of the biggest mistakes seniors make is filing for benefits early, at age 62, when they have little to nothing in savings. Seniors do this in an attempt to boost their income while they continue working. However, by filing for benefits at age 62 seniors are accepting a monthly payment that would be reduced by 25% to 30% from what they would have received had they waited until their full retirement age, which is between age 66 and 67 for today's retirees and pre-retirees. This reduced payment extends for the remainder of their lives. According to the Centers for Retirement Research at Boston College, 45% of seniors claimed benefits at age 62 in 2013.
Are you healthy?
Secondly, your health should be taken into consideration. Generally speaking, if you aren't in the best health, taking benefits early may be the smartest decision. Conversely, if you expect to live a long life, then waiting and allowing your benefit to accrue at roughly 8% per year may be a wise choice.
Unfortunately, none of us has a crystal ball that tells us our expiration date, so betting on our health is a bit of a guessing game. However, we know our bodies well and we have our family's medical history to rely on, which should aid in answering this question.
Do you have a spouse or children to care for?
Deciding when to take Social Security benefits is often thought of as a huge personal decision, but it can also have major consequences beyond just your own income during retirement. Before deciding when to file, consider what your decision could mean for your spouse and/or children.
Deciding when to file can be especially important if you're the higher earning of the two spouses. Should you decide to file for benefits early, you would be reducing the survivor benefit paid to your spouse if you pass away first (assuming the surviving spouse received more from the survivor benefit relative to their own benefit based on their work history). If a higher-income spouse waits to claim benefits, he or she could be setting up their significant other for a higher monthly survivor payment should they pass away first.
Do you have a lot of debt?
More and more seniors are entering retirement with debt on their shoulders, and it's become an issue that should be considered prior to claiming Social Security benefits. According to the Consumer Financial Protection Bureau, 30% of homeowner aged 65 and up had mortgage debt as of 2011, up from just 22% in 2001.
Some seniors may choose to file for benefits early in order to tackle their remaining debt. However, seniors should also take into consideration that Social Security benefits can be withheld prior to hitting your full retirement age if you earn too much money in a given year, thus nullifying the benefits they expected to receive from filing early.
Are interest rates low or high?
A final question to consider, though it's a bit lower on the priority list, is where interest rates are at the moment. A low-interest-rate environment often makes it more palatable to withdraw funds from retirement accounts that could be invested in safer interest-bearing assets. Living off this income means giving up little in lost opportunity cost. Meanwhile, your Social Security benefit can continue to grow each year.
Conversely, a healthy interest rate environment could make you think twice about pulling money out of your retirement accounts, as the opportunity cost of giving up near-guaranteed income is high. In such an instance, claiming benefits early could be worthwhile, but it would generally depend on how much income you'd continue to generate annually from your retirement accounts.
When should you file for benefits?
Ultimately, there is no set answer as to when you should file for benefits since everyone enters retirement with a unique plate of concerns. However, there are a few groups of people that would likely benefit from claiming Social Security earlier than later, as well as some people who would be wise to delay their filing.
Claiming early often makes sense if:
- You're in poor health
- Have a lot of debt
- Are rich and non-reliant on Social Security income
- Have been laid off and have limited working capacity
Conversely, waiting until your full retirement age or later usually makes sense if:
- You're in good/exceptional health
- You have little or no savings
- You're the higher-earning spouse
While far from encompassing, these questions and guidelines should give you at least a starting point in your decision-making process.