Senior citizens will make a myriad of important decisions prior to and during retirement, such as how much of their retirement nest egg to draw upon each month, whether to enroll in original Medicare or a Medicare Advantage plan, and even which state they'll call home during their golden years. But choosing when to file for Social Security benefits might be the most important decision of all.
Social Security's challenging future
The Social Security program, which has been paying out benefits for more than 75 years, is designed to protect lower-wage workers during their retirement. As of February, 60.2 million people were receiving monthly Social Security benefits, 40.3 million of whom are retired workers. The remaining beneficiaries include disabled workers and survivors of deceased but eligible workers.
While Social Security does provide more than 40 million older Americans with monthly benefits, those benefits could come under pressure in less than two decades. The Social Security Administration's Board of Trustees has estimated that the Trust could exhaust its cash reserves by 2035, necessitating either more tax revenue be raised or steep benefit cuts of up to 21% in order to sustain the program for many decades to come.
The program's shaky future rests on two major demographic shifts that are still ongoing. First, baby boomers are retiring at a fast rate, meaning the worker-to-beneficiary ratio is falling. In even simpler-to-understand terms, there are a growing number of retirees and not enough payroll tax revenue being brought in to sustain the payments expected to be made in 20 years. Secondly, people are living longer than ever. Longer life expectancies mean the opportunity for seniors to draw Social Security payments for a longer period of time, further draining the Trust.
Thus, if you expect Social Security to be a major source of income during retirement, you need to be aware that a benefit cut is a genuine possibility.
Should you collect sooner or later?
But this is just one aspect to consider when deciding what the best age is to collect Social Security benefits. Seniors also have to take into consideration the advantages and disadvantages of collecting before or after their full retirement age (FRA), or the age at which they become entitled to 100% of their Social Security benefits. The FRA is a dynamic figure that's based on the year you were born, with people born between 1943 and 1954 having an FRA of 66 years. You can find your FRA with this SSA chart.
As you can imagine, the decision of which route to go is far from cut-and-dried.
For example, filing for benefits early comes with the disadvantage of a reduced monthly benefit. For those born between 1943 and 1954, filing as early as possible (age 62) means receiving a monthly benefit that's 25% lower than your FRA. Based on the average retired worker monthly benefit of $1,344.70 as of February 2016, this means a monthly payment of about $1,008.50. Extrapolated out over the course of a year, this individual would be just barely above the federal poverty level in 2016 of $11,770.
But there could also be advantages to taking a reduced benefit and filing at age 62, 63, 64, or 65. For instance, someone in poor health who doesn't expect to live into their late 70s would see a greater benefit by taking their payments earlier rather than waiting until age 70.
Another example would be someone who's budgeted more than enough money to cover their basic expenses during retirement. Waiting for a larger payment isn't necessary thanks to their lifetime savings and investments, meaning receiving a Social Security benefit sooner to cover entertainment and travel expenses might be worthwhile.
Women can also benefit in a big way by filing early. As a whole, women have longer life expectancies than their male counterparts, meaning if they outlive their husbands they'll have the option of receiving the higher of two payments -- that being their own Social Security benefit or the survivor benefit from their husband (assuming he didn't also file for benefits early).
Wait until after your FRA
The other option here for seniors is to wait patiently until after their FRA to file for benefits.
The major advantage of doing this is a higher monthly benefit. Social Security benefits increase with each month that passes, averaging about 8% per year. For Americans born between 1943 and 1954, this might mean receiving up to 132% of your FRA if you wait all the way until age 70. Based on the aforementioned average retired worker benefit of $1,344.70, this could work out to a pretty nice $1,775 monthly benefit payment by age 70.
Additionally, waiting until at least your FRA and beyond allows you to avoid the hassle of withheld Social Security benefits. The SSA withholds $1 in benefits for every $2 you earn in income over $15,720 in 2016 if you file for benefits and are below your FRA. Those reaching their FRA during 2016 are subject to a $1 benefit withholding for every $3 they earn above $41,880. Waiting to file until your FRA or after means not having to deal with any withholding nonsense.
Of course, waiting may not make sense either. If you have debts entering retirement that you want paid off, then waiting may not be in your best interest. Filing for benefits earlier could give you the income necessarily to make these debts go away.
As discussed above, your health matters, too. If you're not expecting to live into your late 70s, taking benefits earlier than age 70, or even before your FRA, may be optimal.
What's the best age to collect Social Security benefits?
Now that we've looked at some of the key advantages and disadvantages of filing early or late for benefits, you might be wondering what the best age is to collect. In reality the answer will likely be different for everyone, although with growing life expectancies and quite a few baby boomers entering retirement with insufficient savings, waiting is probably going to be a better choice than filing for benefits early when looking at things in a broad perspective.
Here are some questions you'll want to consider when weighing your decision.
- How long do I expect to live? No, there is no such thing as a life expectancy crystal ball, but you know your medical history and that of your family better than anyone else on this planet. If you believe you have a good shot of eclipsing your late 70s, then waiting to file for benefits can result in substantially higher lifetime benefits. If you don't believe your health is the best, taking income earlier may be warranted.
- Can I cover my basic retirement expenses? One of the big reasons early filing is so popular is because seniors needs the income to cover their monthly expenses (food, rent, electricity, debt, and so on). Unfortunately this can be a devastating choice since it means reduced payments for life. In theory, seniors who've amassed a healthy nest egg and can cover their basic expenses have little incentive to wait. Conversely, those with little in retirement savings should do everything possible to hold off on filing so as to allow their benefits to grow over time. This could mean working for years beyond your expected retirement.
- Do I have a spouse to protect? Another consideration is whether or not you expect to outlive your spouse. As described above, women tend to outlive men, meaning a husband who waits to file for benefits could be setting up his wife for a bigger benefit payment upon his passing. You and your spouse will want to discuss the ramifications of early and late filing on your survivor benefits.
And when in doubt, keep in mind that Form 521, also known as the Request for Withdrawal of Application, exists to correct any regrets you may have about filing for benefits early. As long as you file Form 521 with the SSA within 12 months of first claiming benefits, and you repay every cent of benefits received (including benefits that may have gone to a spouse or child), it'll be as if your filing never occurred and your benefits will keep accruing at a rate of roughly 8% per year.
As long as you really take the time to weigh your options, you can make the Social Security program work for you.