Don’t File for Social Security Until You’ve Answered These 3 Questions

Chances are, Social Security will play a big role in your retirement finances. That's why you really need to be strategic in claiming benefits. Here are three key questions you should be able to answer before you begin to think about filing.

1. Have I reached full retirement age?

Your Social Security benefits are calculated based on how much you earned during your time in the workforce (specifically, your highest-paid 35 years on the job). But the age at which you file for benefits could affect the amount you actually wind up collecting.

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If you file for benefits at full retirement age, or FRA, you'll get the exact monthly benefit your earnings record entitles you to. Your FRA depends on your year of birth, as follows:

Data source: Social Security Administration.

That said, you're allowed to file for Social Security as early as age 62. Claiming benefits before FRA, however, will result in a reduction in your monthly Social Security income, and most likely a permanent one. The extent of that reduction will depend on your FRA and how early you file, but in the most extreme scenario (filing at 62 with an FRA of 67), it can add up to 30% less. Therefore, it often pays to wait until FRA to take benefits unless you have a compelling reason to file sooner.

2. Are my savings healthy?

Social Security should, ideally, make up only a portion of your total retirement income. But if you don't have much in the way of savings, it could end up constituting the bulk of it. If so, then claiming benefits at full retirement age may not make sense. Rather, you should think about delaying benefits past FRA. For each year you hold off, you'll accrue credits that boost your benefits by 8% a year, up until age 70, at which point this incentive runs out. Therefore, be sure to assess your savings before filing for Social Security. If your nest egg isn't all that substantial, delaying and growing your benefits could be your best shot at salvaging your retirement.

3. Would I like to continue working?

One nice feature of Social Security is that you're allowed to work and collect benefits simultaneously. You might need those benefits to supplement your earnings later in life, especially if you're forced to cut back on your working hours due to health issues. Or, you might simply want those benefits to enjoy life while you're a bit younger.

That said, if you file for benefits ahead of FRA, you'll risk having a portion of them withheld if your earnings exceed a certain threshold. That limit changes from year to year, but in 2019, you'll have $1 in benefits withheld for each $2 you earn above $17,640. The only exception is if you'll be reaching FRA later this year, in which case you can earn up to $46,920 without affecting your benefits. From there, you'll have $1 in Social Security withheld for every $3 you earn.

Notice that these benefits are withheld, and not lost. The Social Security Administration will add them back into your monthly payments once you reach FRA. But the reduction in benefits you'll face by filing early will be money you'll lose forever, so if you plan to continue working and expect to earn a decent living, it might pay to hold off on claiming benefits until you reach FRA. At that point, you can earn as much as you'd like and still collect your benefits in full.

The decision to file for Social Security isn't one to be taken lightly. Be sure you can answer these three questions before signing up.