One of the biggest decisions you'll face in your retirement is when to take Social Security. On average, seniors receive 39% of their income from the program, and over half of seniors get more than half of their income from Social Security.
You can start receiving Social Security retirement benefits as young as age 62, and between age 62 and 70, the longer you wait to start, the higher your benefit will be. Key factors you should consider in your decision include:
- How long you reasonably expect to live,
- When you expect to stop working for pay,
- What other sources of income you'll have, and
- What expenses you'll need to cover.
The ages that count
There are three key age-related milestones in the Social Security system, age 62, your full retirement age, and age 70. Most people start collecting as they reach one of those milestones, with the specific age they choose depending on their own personal circumstances.
Age 62: This is the minimum age that you can start claiming retiree benefits from Social Security. The advantage of claiming at age 62 is that you will receive your benefit for the longest possible time. The key disadvantages are that your monthly check will be smaller by claiming early than it would be by waiting until your full retirement age and that if you're still working, you could face a penalty that reduces your monthly check.
If you're below your full retirement age and still working while collecting Social Security, your Social Security benefit for the year will be reduced by $1 for every $2 you earn above $15,720. In the year you reach your full retirement age, the penalty decreases to $1 for every $3 you earn above $41,880. You will eventually get the money back that you lost to that penalty, once you pass your full retirement age, but it may take as many as 15 years to get it back.
Your full retirement age: This is the age that Social Security uses to calculate your base benefit amount. If you have a "My Social Security" account or receive a periodic statement from Social Security indicating your estimated benefit amount, this is the key headline number estimated in that statement. If you claim at exactly your full retirement age, you will receive exactly your full benefit amount. In addition, once you reach your full retirement age, you can continue to work while receiving Social Security without facing that penalty.
If you were born before 1950, you've already reached your full retirement age. For those born between 1950 and 1954, you reach your full retirement age on your 66th birthday. If you were born in 1960 or later, you reach full retirement age on your 67th birthday. In between 1954 and 1960, the full retirement age 'steps up' by two months for each year. For instance, if you were born in 1955, it's 66 years, 2 months.
Age 70: Once you reach age 70, your Social Security benefit no longer increases based on you waiting to collect. As a result, even if you are still working a full time job, have enough income from other sources to cover your costs of living, and expect to live to age 100, you should start collecting from Social Security once you reach 70.
It's absolutely true that up to 85% of your Social Security income could be subject to income taxes if your income is high enough. Still, you're better off taking the Social Security check and losing some of it to taxes than not getting any of it at all.
So what's the best age? It depends on you
Within the framework created by those three key age milestones, the best age to start taking Social Security is largely a personal choice based on your individual circumstances. Actuarially speaking, the typical person's lifetime benefit will be about the same, regardless of when he or she chooses to start. Still, your choice depends on your perspective on the factors mentioned at the beginning of this article.
How long you reasonably expect to live: The sooner you anticipate passing away, the less sense it makes to wait to collect, and the longer you expect to live, the more sense it makes to wait to get those larger payments from delaying. While you're unlikely to know with certainty how long you'll live, consider your family's history, your own medical conditions, and how active your lifestyle is when building your estimate.
When you'll stop working for pay: If you're earning enough money from work to cover your living expenses, it doesn't make much sense to collect Social Security before your full retirement age. This is due to both the permanent reduction from collecting early and the penalty for working while collecting while under your full retirement age. Once you've reached age 70, you should collect even if you are still working for pay, since there is no benefit for waiting any longer.
If you're still working for pay between your full retirement age and age 70, figure out what you'd use your Social Security check to cover. If it's worth it to you to collect a smaller amount each month and potentially have more of your benefit subject to taxes to get that cash flow started sooner, then go for it. Otherwise, your monthly Social Security benefit does continue to increase the longer you wait up until age 70, and if you have no need for the money sooner, it's OK to keep waiting until then.
What other sources of income you'll have: Although you'll likely face a penalty for working while collecting Social Security below your full retirement age, you won't face that penalty for pension or investment income. If you're eligible for a pension, you'll want to check for the pension's "Social Security Integration" policy and use that to help guide your decision. If you're expecting your investments to cover a significant portion of your retirement, there are trade-offs to consider.
On one hand, taking Social Security sooner means that you'll have to liquidate less of your portfolio to cover your living expenses during the early years of your retirement. That lets you keep more of your portfolio in growth-oriented investments for longer, which can potentially improve your lifetime spending ability.
On the other hand, each year you wait up until age 70 increases your Social Security benefit by as much as 8%. It's virtually impossible to find guaranteed income growth at that level, which makes it a tempting choice to wait. Just be sure you've got your living expenses covered from some other source, as it makes no sense to starve today for the potential of a higher payout in the future.
What expenses you'll need to cover: Other than medical expenses and the costs of hiring people to help with tasks you used to be able to do by yourself, people's costs of living tend to decrease as they age. As of March 2016, the average Social Security retiree benefit is about $1,345 per month, and the average spousal benefit is about $695 per month. The average retiree benefit is enough to keep a single person above the Federal Poverty Level, and adding spousal benefits keeps a couple above poverty level, too.
If you absolutely need the income from Social Security to cover your basic costs of living, go ahead and take it early. Otherwise, consider that the longer you wait to collect up until age 70, the more of your monthly expenses Social Security will be able to cover for you.
Your retirement, your choice
The age you choose to take Social Security can make a significant difference in your monthly income and in the overall quality of your retirement. There's no one size fits all answer to the question of which age is the best one to collect. With a good handle on the key factors that go into the decision and your own knowledge of your personal financial situation, though, you're now better equipped to make a more informed decision for yourself. And that's a key part of you being able to rule your own retirement.
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.