Traditionally, people have been able to claim their full Social Security retirement benefits at age 65. That, combined with Medicare eligibility also starting at 65, firmly established age 65 as the standard retirement age in the minds of most Americans.
Although that age still represents a key milestone in most people's designs for their retirement, if you're planning to claim Social Security at 65, you may need to rethink that plan. The world -- and the rules around claiming benefits -- has changed substantially since Social Security was first launched, and age 65 may no longer be the best age for you to claim your benefits. Here are four reasons why your plans for claiming Social Security at age 65 may need to change.
1. If you haven't reached it yet, your full retirement age is after 65
People turning 65 in 2020 were born in 1955. The full retirement age for people born in 1955 is age 66 and two months. If you were born after that year, your full retirement age is even later -- currently reaching age 67 for those born in 1960 or later. Claiming Social Security before your full retirement age means you will receive less each month than you would have received by waiting until you reached that age.
In addition to that lowered benefit level, if you're still working while collecting benefits and you're below your full retirement age, you get penalized. In 2020, that penalty is as much as $1 for every $2 you earn above $18,240 for the year. The combination of lowered monthly benefits for the rest of your life and an immediate penalty when you collect early while still working should give you reason to reconsider the plan to collect at 65.
2. Age 62 is actually the most common age to start collecting
If you're planning to start collecting Social Security at age 65, you need to have a plan for a way to cover your costs in the years before you reach that age. Despite the lowered benefit for claiming Social Security before the full retirement age, 62 is the most popular age to start collecting benefits. Given the penalty for collecting early if you're still working, that suggests a lot of people take their Social Security early because they're out of work with not much chance of going back.
According to the Bureau of Labor Statistics, people's participation in the labor force tends to start dropping off once they pass age 55. On a likely related note, Social Security's statistics indicate that around 75% of people receiving disability benefits are over age 50, indicating the likelihood of disability increases with age. As a result, even if you would like to work until age 65 or beyond, you'll want to be prepared for a career that may end earlier than that, just in case it does.
3. Social Security is taxed based on your total combined income
If you're married and file jointly, your Social Security benefits get taxed starting at $32,000 of what is known as your combined income. If you're single, your benefits start getting taxed when that income level reaches $25,000. Note that your combined income amount even includes interest that might otherwise be tax-free, such as from municipal bonds.
As a result, depending on your overall financial position and asset allocation strategy, you may want to delay taking Social Security to reduce your overall tax burden in your retirement years. One such reason could be if you have a decent amount saved in after-tax accounts and you're planning on doing aggressive Roth IRA conversions of your traditional retirement account balances. Delaying Social Security in that situation could potentially reduce the total tax dollars you pay over your retirement.
4. Delaying Social Security provides a decent "guaranteed" return
You can start taking Social Security retirement benefits at any age between 62 and 70, and the longer you wait within that window, the higher your monthly benefit will be. If you wait beyond your full retirement age, you'll get a delayed retirement benefit of 8% per year you wait. Although waiting means you'll go more months with $0 benefit in the early years of when you could be receiving cash, it also means each check will be that much larger once you do start collecting.
That additional amount each month can make a huge difference if you expect to rely on Social Security for a significant portion of your retirement income. And it can be especially valuable later in your retirement when it's tougher to go back to work and your other savings may be at greater risk of running out.
Have a plan, but know your options
One of the best features of Social Security is that its age-based payment method means you're likely to get around the same amount paid to you over your life no matter when you start collecting. As a result, when your plans for retirement change, you may be able to shift your Social Security claiming strategy to change right alongside with those other plans. That gives you the freedom to build a plan with the flexibility to adjust as reality unfolds around you.
So if age 65 still seems like the right age for you to start claiming your Social Security, feel free to keep that age in your plans. Just know that if there's a need to shift it in either direction, as long as you haven't yet started claiming, you can move it.