Social Security supports tens of millions of Americans, and for many of them, when to start receiving Social Security benefits is one of the most important financial decisions they'll ever make. Yet the choice of whether to take Social Security early is a tough one, with a number of factors giving conflicting advice. There's no perfect one-size-fits-all answer, but to try to help you make the right decision for your situation, we took a look at three of the keys to making a smart choice about when to start taking Social Security benefits.
1. Is getting less money now worth more than having more money later?
It's a fact that, by taking Social Security early, your payments will be smaller than if you waited -- as much as 25% less for claiming at age 62 versus age 66. The fact that you get additional payments upfront makes many turn to what's known as breakeven analysis -- the age when the total amount of payments received from claiming Social Security early matches up with what you'd receive if you waited until later to collect. With breakeven dates typically in your late 70s or early 80s, you can make your own personal health assessment about whether you'll live long enough for claiming at a later age to pay off.
However, one reason why so many people take Social Security benefits early is that they put a higher value on money they receive earlier, even though it's a smaller amount than they'd receive if they waited until full retirement age or beyond. For some, taking early Social Security is a matter of necessity, while for others, it's just a personal choice.
It's important to recognize that maximizing your perceived value from Social Security doesn't necessarily mean getting the most money out of the program. If you value money early in retirement more highly than money later in retirement -- as many do -- then you might reasonably prefer to take Social Security early, even if the raw numbers suggest a different answer.
2. Your family status can make a huge impact on the right decision.
When you're only dealing with a single worker, analyzing Social Security is much simpler. When families get involved, though, things get a lot more complicated. What seems like the right decision for one family might well be different for another or for a single retiree.
Two things stand out in particular. First, tactics like the file-and-suspend strategy, or the filing as a spouse first strategy, are often available to married couples and can boost your overall take from Social Security. For the most part, though, they require one or both of the spouses involved to wait until full retirement age to claim Social Security. If you take Social Security early, you might no longer be eligible, and the impact can be much larger than just the percentage reduction in your own benefits.
Second, survivors benefits are based, in part, on when you claim Social Security. Because of this, it can sometimes make sense, even for people with terminal illnesses, to wait before taking Social Security benefits, because it can increase the amount that a spouse, children, or other loved ones receive based on your work history.
Because of the many intricacies in how various benefits interact, this isn't always an easy decision to make. But it's good to know how spousal and survivors benefits can change the right answer dramatically.
3. If you have other assets, coordinating Social Security with withdrawals from those sources is crucial.
Many people rely almost entirely on Social Security in retirement, but some manage to save through employee pension or 401(k) plans. Others have their own IRAs, and save in regular accounts, as well. Once you retire, taking money from these other sources has financial implications, and integrating your Social Security decision into your big-picture financial plan is the best course to take.
Specifically, some people find that, by taking Social Security early, they're able to keep money in tax-favored accounts longer, earning tax-deferred or tax-free income longer than they'd otherwise be able to do. For others, withdrawing from retirement accounts first and deferring Social Security until later is a better move, especially if managing IRA and 401(k) withdrawals from a tax perspective leads to a lower tax bill than taking early Social Security and taking out retirement plan money later. Again, the answer will differ for each individual situation, but just asking the question helps you ensure that you don't make a critical mistake -- whether it's by taking Social Security early, or by waiting longer than you should.
Making a smart decision about whether to take Social Security early takes a bit more effort than most people are willing to give. By considering these factors, though, you'll be better informed, and make sure you make the right choice in planning for your retirement.