Social Security plays a key role in most Americans' retirement plans. You can start taking your Social Security retirement benefits at any age between 62 and 70. The later in that window you start, the more each payment will be, but the fewer number of payments you'll get over your lifetime.
That trade-off of time vs. money raises a key question: What is the best age for you to take your Social Security retirement benefit? Unfortunately, that's a question that's much easier to ask than to answer unless you have access to a working crystal ball. Still, there are a few key guidelines you should consider when contemplating taking your own Social Security benefit.
The basic timetable -- and one key date to note
The chart below from Social Security shows the change in your benefit amount based on the year you were born and the age at which you start taking benefits. It may seem complicated, but note from the perspective of lifetime dollars received, it's roughly a wash on average. In other words, the typical recipient will get about the same over his or her lifetime regardless of when that person starts taking benefits.
Within that timetable, the most important date to note is your normal retirement age. If you start collecting before your normal retirement age, there's a $1 penalty for every $2 in earned income you have above a fairly low threshold ($15,480 in 2014). The penalty is less in the year you reach full retirement age -- and disappears once you pass it. Because of that penalty, it's typically a good idea to not start collecting Social Security before your full retirement age if you're still working.
Other key factors to consider
While it might be a wash on average no matter when you start collecting, your personal circumstances may make a huge difference for when you should collect. Key factors to consider include:
- If you really need the money, go ahead and start collecting early. Just be sure to understand that it's a permanent reduction in your benefit and that the only increases you'll get will be in line with the official inflation rate.
- Your health and expectations for longevity for both yourself and your spouse also matter. If you expect to be vibrant and active into your 90s, then you'll likely be better off waiting as long as possible to get that larger check. If, on the other hand, you expect to pass away or be in a Medicaid-supported nursing home at a fairly young age, then you'll likely either collect more or at least get more use out of the money if you start early.
- Your investing prowess could be important, too. If you're an excellent investor, taking Social Security early will let you compound more of your invested money for a longer period of time, giving you the potential for a higher lifetime income level. On the flip side, the 8% per year increase in your Social Security benefit that you get from waiting is just about the best guaranteed boost available.
- Your other sources of income matter, too. If you're still working or have a pension or other investment income that sufficiently covers your costs, then waiting may make sense. With enough other income, up to 85% of your Social Security benefit can be subject to income taxes. Delaying gets you an 8% increase in your payment and keeps your Social Security benefit out of your taxable income until you do start collecting it.
It's your Social Security -- and your choice
Ultimately, when to take your Social Security boils down to a personal choice based largely on how those factors along with a few others play out in your individual situation. Unless you have a crystal ball and know your future with certainty, there are few huge mistakes in choosing when to collect.
So consider what you know about your current situation and what you honestly believe your future will hold, and decide for yourself what looks like it will work best for you. As long as you understand the trade-offs and make an informed decision based on your circumstances, chances are very good that it'll be a smart one for you.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.