It's hard to decide when to take Social Security. Most people can claim as early as age 62, but you'll suffer a reduction of as much as 30% in the monthly payment you receive if you do so rather than waiting until your full retirement age. Yet getting benefits for several extra years is more-than-enough compensation to entice tens of millions of Americans into taking their Social Security early.
It's true that, in some cases, it's actually smart to claim benefits early, and as Fool personal finance expert Maurie Backman explains here, you can make a case for taking Social Security as early as possible. Yet as difficult as it can be to wait, there are also some good reasons why you should consider not claiming Social Security early. Even if your circumstances change and force you to make a different decision when it actually comes time to retire, knowing why it might make sense to wait can help you plan your entire retirement financial strategy more effectively.
1. You're still working and will end up forfeiting your benefits anyway
The most obvious situation when it doesn't make sense to claim Social Security early is if you're still working and making enough money that you'll have to forfeit whatever you receive in benefits. The Social Security Administration (SSA) has rules that force you to give up what you get from Social Security if your income is above certain limits.
Specifically, if you make more than $17,040 in 2018 and won't reach your full retirement age during the year, you'll have to give up $1 in annual benefits for every $2 you make above that $17,040 threshold. For someone who'd be slated to get a roughly average monthly check of $1,400 from Social Security, earnings of more than $50,600 would completely wipe out your benefits.
This isn't as bad as it sounds, because in exchange for forfeiting benefits, the SSA treats you as if you had actually waited to claim benefits later. So if you lost a whole year's worth of benefits, you'd effectively get the same benefit amount later that you would have gotten if you'd waited an extra year before claiming. If you know you're going to be working, it's simpler to put off claiming, even if you're old enough to get early benefits.
2. You want to leave your family the most benefits possible
Many people decide when to claim Social Security based solely on their own expectations. Yet in many cases, it's not just your benefits that will suffer a big reduction if you claim early.
Survivor benefits for spouses and eligible children are determined, in part, by when you claim your primary retirement benefits. If you claim early, then the lower monthly payments you get will also be reflected in what your family receives in monthly survivor benefits after you pass away.
Whether those survivor benefits are important depends on your family situation. For spouses who have worked and will have their own retirement benefits, survivor benefits aren't necessarily an important consideration. But for single-earner families, or for those who have disabled children who will be eligible to receive benefits throughout their lives, waiting to claim can have a huge positive influence on their financial futures.
3. Your tax situation might be better if you wait
Many people don't realize that Social Security benefits can be taxable. To find out, take half the benefits you get and add them to any other income that you have. If the total is more than $25,000 for singles or $32,000 for joint filers, then a portion of your Social Security can be subject to income tax.
In some cases, claiming early makes it more likely that your benefits will be taxable. The most common situation is for married couples who file jointly, where one spouse is still working. Even if it's your spouse and not you who brings in taxable income, your spouse's earnings still count toward that threshold.
Social Security can be taxable at any age, so waiting doesn't necessarily get you off the hook. But if you wait, your financial situation might change enough to help you avoid tax.
Be smart with Social Security
Deciding when to take Social Security is one of the toughest choices you have to make financially. If you're aware of the arguments both for and against claiming early, you'll be in a better position to decide which course of action is best for your particular situation.
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