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Read This Before You Take Social Security

By Chuck Saletta - Mar 28, 2015 at 9:06AM

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When to take Social Security is an important decision all seniors have to make.

This article was originally published on March 28, 2015 and was updated on Aug. 16, 2015.

Source: Flickr user Jenn Durfey.

One of the most important decisions you have to make when it comes to your retirement is when to start taking your Social Security benefits. Generally speaking, you can start any time between age 62 and age 70, and the longer you wait within that window, the larger your monthly check will be.

While there are a few hard-and-fast rules regarding when to take your Social Security, many of the factors that go into your decision will be based on your individual circumstances. Once you do elect to start taking those benefits, you're pretty much locked in for life -- though you do have a once-in-a-lifetime do-over option within your first year of collecting.

What are the easy choices?
Among the few easy choices you have when it comes to taking your Social Security benefits is this one: If you've already reached age 70 and haven't started to collect, sign up to take it. There's no benefit to waiting one minute longer, even if you're working full-time.

Another easy choice: If you haven't reached your full retirement age and you're still working, do not sign up to take Social Security unless you have absolutely no other way to make ends meet. If you're below your full retirement age, Social Security will reduce your benefit payment by $1 for every $2 you earn above $15,720. If it's the year in which you reach your full retirement age, that penalty shrinks to $1 for every $3 you earn above $41,880 prior to the month you reach full retirement age. Granted, those withheld benefits will be repaid once you reach full retirement age, but if your earned income is enough to live on, you should strongly consider waiting until your full retirement age or later to claim benefits so that you eventually receive at least the full benefit amount you're entitled to.  

If you're turning 66 in 2015, you'll be at your full retirement age for Social Security purposes. However, the full retirement age is gradually being raised, and for people born in 1960 or later, it's age 67. 

And the last easy choice: If you've retired early and do not have sufficient savings or pension income to cover your basic costs of living without Social Security, by all means, sign up to take it. It makes no sense to starve or dig yourself deep into debt just to get a bigger Social Security benefit down the road.

Where would a crystal ball be helpful?
Unfortunately, the other key factors that will help you decide when to take your Social Security benefit require you to have a better ability to predict the future than we mere mortals possess. There are three key factors to consider, some of which are easier to speculate about than others. If there's a consolation prize, though, it's that your lifetime Social Security benefit is likely to be roughly equivalent, actuarially speaking, no matter what age you are when you start collecting. 

Factor 1: How long will you live? The longer your anticipated life span, the more it makes sense to wait to start collecting Social Security. The higher benefit checks that come from waiting to age 70 will get paid for more years, and the higher starting payment will better help you combat inflation.

Factor 2: What other sources of income will you have? The higher your income from other sources (like a job, a pension, or the installment sale of a small business you owned), the more it makes sense to wait, assuming that other income adequately covers your costs of living. Because Social Security has an inflation adjustment that those other income streams may not, the longer you can delay Social Security, the higher the portion of your income stream that will have that inflation protection.

Factor 3: How well will your investments perform? The better your return on investment, the more sense it makes to take your Social Security earlier. By collecting sooner, you can allow more of your investments to continue compounding on your behalf. While you could collect less from Social Security over your lifetime by starting earlier, your net financial position may be better in the end if your investments perform exceptionally well. However, keep in mind that your Social Security benefits will increase by 8% for every year you delay collecting them -- and a guaranteed 8% annual increase is hard to beat.

If your crystal ball is working properly, you'll know how these factors will play out before you have to decide when to start collecting Social Security. If not, just make your best estimate based on what you know at the time you're faced with the decision.

Prepare for the choice that counts
Once you start Social Security, you have a one-year window to hit the reset button, return the benefits you've received, and start over. Once that window passes -- or once you've already exercised that option -- your Social Security benefit is locked.

That said, so long as you work within the "easy choices" and have an end-to-end plan designed around your total retirement needs, chances are good that Social Security will play its intended role in that plan, helping you enjoy the golden years you've worked so hard throughout your life to reach.

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