Roughly one-third of Americans rely on Social Security for more than 90% of their retirement income, so choosing when to claim Social Security can be one of the most difficult and most important decisions you face in your 50s and 60s. If you're struggling to decide when to claim your Social Security benefits, you're not alone. Do you understand the pros and cons of claiming early, on time, or waiting?
Bird in the hand
Social Security can replace about 40% of your pre-retirement income, but if you claim benefits at age 62, you're going to get less per month than you would have received if you waited until you're older to claim.
If you're turning 62 this year, then your full retirement age, or the age at which you're entitled to 100% of your Social Security benefit, is 66 years and two months. If you claim your benefit now, then you'll get monthly checks equivalent to about 74% of the amount you'd receive at full retirement age. For instance, if you're supposed to receive $1,000 per month in Social Security at age 66 and two months, then you would get about $741 per month, if you claim at age 62 this year.
For many Americans, retirement's allure may outweigh the potential for a bigger payoff later on, especially if Social Security is supplementing your retirement income, rather than representing the lion's share of it.
If that's the case for you, then collecting reduced Social Security income now might be best, particularly if you're concerned about Social Security's long-term solvency.
As a refresher, the payroll tax revenue supporting Social Security payments has fallen short of the program's outlays to current recipients since 2010, and as a result, Social Security is making up the difference by tapping the Social Security trust fund. Unfortunately, that trust fund isn't bottomless, and that's got Social Security's trustees estimating that without congressional action, the trust fund will run dry in 2034, causing an across the board 25% cut in payments to recipients.
Personally, I think Congress will protect this important program before that happens, but there's another important reason why taking benefits early might be wise.
A look at the various breakeven points for Social Security claiming strategies reveals that the total dollars paid out to you if you wait to claim doesn't surpass the total amount paid out to you if you claim at age 62 until you're deep into your 70s.
If you don't rely on Social Security to live on, and you invest your Social Security checks, then your breakeven age could get pushed back into your 80s or beyond, depending on your average annual returns.
Playing it down the middle
Social Security is designed to pay out the same amount in total lifetime benefits, regardless of when you claim. The program does this by using average life expectancy estimates, and then reducing or increasing payments, depending on what age benefits are claimed.
Since the total amount received is supposed to be the same over time, individuals who are currently employed and would like to continue working might want to hold off on claiming until hitting age 66 and two months.
Individuals who claim earlier than full retirement age, and who continue working, can have their Social Security check reduced if their earnings eclipse specific income thresholds. In 2017, earning more than $16,920 can result in a $1 reduction in benefits for every $2 earned about that limit. Money that's withheld is added back to benefits at full retirement age, so you don't lose it, but it's definitely something to take into consideration.
Furthermore, you may find it beneficial to continue working full-time a few more years in order to boost your Social Security benefit at full retirement age. Social Security is based on your highest 35 years of inflation-adjusted income, so if you're more highly compensated in your 60s than you were in your 30s, and you've already accumulated a 35-year work history, then you might want to continue working to remove those low-income earning years from your benefit calculation.
Also, there can be tax implications associated with working and receiving Social Security that could make it advantageous to delay claiming benefits. For instance, if you're single and earn over $25,000, then there's a good chance you'll have to pay taxes on at least some of your Social Security income. Therefore, if taking Social Security now means that some of it will be taxed, and waiting means it won't be taxed because you expect your income will fall below the threshold, then you might want to wait.
Padding your payout
If you want the absolute biggest Social Security check you can get in retirement, then when to claim is simple -- wait until age 70.
Social Security rewards you with bonus payments called delayed retirement credits if you claim after your full retirement age and those credits can add up. Specifically, the IRS increases your monthly benefits by two-thirds of 1% for every month that you delay claiming your benefit beyond full retirement age. That works out to 8% per year. For example, if you were born in 1955, and you wait to claim until you reach age 70 (the latest you can wait and still receive the delayed credits), then your payment would be 130 2/3% of your full retirement payment.
That's a pretty nice guaranteed bump up in your monthly income, especially if you plan on relying heavily on Social Security to pay your bills in retirement but don't need the money now.
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