Social Security provides the cornerstone of most Americans' retirement plans. In concept, the program looks simple: You have money taken out of every paycheck to help cover the cost of your benefits. Once you retire, you start collecting, with your benefit based on your contributions over the course of your career.
In practice, however, when it comes to collecting, Social Security can be a minefield. For instance, if you were born in 1960 or after, what you receive can be as low as 70% of what you expect or as high as 124% of what you expect, based on how old you are when you start collecting. And that's only one of the possible things that can affect what you take home from the program. To make the best decision for yourself about collecting your Social Security, there are four critical dates to understand.
1. Your 62nd birthday
You can start collecting Social Security retirement benefits once you turn 62. Doing so will give you benefits for the longest amount of time possible, as your benefits continue throughout your life. Still, that early collection comes at a cost. Your monthly benefits are permanently reduced by around 30% compared to what you would have gotten by waiting until your full retirement age. In addition, if you're still working while collecting at that age, you get penalized $1 for every $2 above $18,240 you earn in the year.
Still, despite those downsides, age 62 remains the most popular age to claim benefits. It may very well make sense for you to collect at that age, particularly if you have no other source of cash to cover your retirement costs or are expecting a short retirement. It could also be a great age to collect if you're looking to make Roth IRA conversions from your traditional retirement plans and need a source of cash to cover the conversion taxes.
2. Your 65th birthday
Age 65 was Social Security's traditional full retirement age. It used to be that at that age, you could start collecting benefits, get the full monthly amount you were promised, and continue to work without facing a penalty for collecting. Those benefits are no longer available on your 65th birthday, but that age matters because it's still the age most Americans become eligible for Medicare.
That matters because most Social Security recipients who also receive Medicare have their Medicare Part B premiums directly deducted from their Social Security payments. This affects you in two ways. First, if you were receiving Social Security before you became eligible for Medicare, you'll see your Social Security check shrink once your Medicare Part B premiums begin getting deducted.
Second, Medicare has a "hold harmless" provision. That provision keeps your Medicare Part B premium from increasing faster than your Social Security benefit, as long as that premium is deducted from your Social Security payment.
In other words, assume Medicare Part B premiums are scheduled to increase by around $8 per month next year and your Social Security benefit is only scheduled to increase by $5. Without the hold harmless provision, your net Social Security payment would actually drop by $3 per month. Instead, thanks to hold harmless, it would hold flat as your $5 increase in benefits would offset the $5 of that premium increase you were exposed to.
3. Your full retirement age
Once you reach your full retirement age, which, for people who haven't reached it yet, is somewhere between age 66 and 67, a few key things happen. First, if you begin collecting at that age, you will receive exactly what your Social Security earnings record indicates you should receive. Second, you can begin collecting at your full retirement age even if you're still working, and you will no longer face a penalty for doing so.
In addition, if your spouse is planning to collect Social Security based on spousal benefits instead of their own work record, those spousal benefits stop increasing at full retirement age. That may make the calculation on whether to collect or wait past full retirement age a little trickier for married couples with vastly different income levels.
4. Your 70th birthday
After you pass your full retirement age, you earn delayed retirement credits if you choose not to take your Social Security benefit. Those credits add around 8% per year to your benefit level, but you stop earning them once you reach age 70. As a result, once you reach age 70, you absolutely should start taking your Social Security benefit if you haven't already, as you no longer earn a benefit from waiting.
If your 70th birthday has already passed and you haven't yet started collecting, all is not lost. You can apply for retroactive benefits that go back up to six months, which can help you recover some of the payments that would otherwise have been permanently lost.
Your benefit, your choice
The advantage of Social Security's claiming structure is that it gives you flexibility to begin collecting based on what makes sense for your personal situation. The disadvantage of it is that there are several age-based trade-offs that can impact what you will actually see once you do start to collect. These four critical milestones are the ones that have the biggest impact on the monthly benefits you receive. By understanding them, you can make a more informed decision for your own collection date.