Are you thinking about filing for Social Security benefits? The choice may seem simple, but it has profound consequences for your financial security throughout retirement.
Before you claim your benefits, be sure you aren't making a choice you will regret. To do that, ask yourself these three questions first.
1. What's your break-even point?
Social Security benefits can be claimed starting at 62, but you can raise your benefits for each month you wait up until 70, when there's no further advantage to delaying.
The benefits formula is structured so if you start getting checks early, you'll get smaller checks. If you claim later, you'll get larger checks that make up for the forgone funds. But this only works if you live long enough for the bigger checks to do that.
Before you claim your benefits, calculate your break-even point by:
- Determining how much in monthly income you'd receive at the younger claiming age.
- Figuring out how much money you'll miss out on by waiting to start your checks (for example, if you'd receive $13,152 in annual benefits at 62 but wait until 64, you'd miss out on $26,304).
- Determining how many higher monthly checks you need to account for the missed benefits. If your benefit is $171 per month higher due to waiting from 62 to 64, it would take you about 153 months ($26,304 divided by $171), or around 13 years, to make up for the forgone funds.
By calculating your break-even point, you can assess (based on your personal and family health history) if you're likely to live long enough to reach it.
2. How do I want to spend my money in retirement?
For some retirees, claiming benefits early makes sense because it provides more money early on to enjoy life.
You may not care if you have a lot of cash late in your 70s or 80s, when your health may be waning and you may be stuck at home. If so, you may be willing to accept early filing penalties and claim Social Security ASAP.
On the other hand, if you're worried about how to cover substantial healthcare costs that you could incur later in retirement, you may strongly prefer to claim Social Security later so you can max out your monthly benefit for the highest guaranteed income late in life.
3. Am I doing the right thing for my spouse?
Your decision won't affect only you if you're married.
If you put off claiming your own Social Security benefit, for example, your spouse will not be able to begin spousal benefits until you've started your own checks. On the other hand, if you claim benefits early and were the higher earner, you'll shrink the survivors benefit your partner will receive if you die first.
It can be complicated to determine how to maximize your joint lifetime income as a married couple, but make the decision together. In many cases, this means the lower earner claims benefits first to provide money for you both to live on, while the higher earner delays to maximize benefits. This can mean more combined benefits later, as well as more for the surviving spouse.
Because of the challenges in deciding on the best claiming strategy as a couple, you'll want to look carefully at all your options and even consider talking with a financial advisor.