10 Things to Consider Before Signing Up for Social Security

Social Security provides a key foundation for most Americans’ retirement plans. The program is fairly straightforward, in that you pay into the system throughout your working life, and then when you retire, your benefit levels are somewhat linked to the payments you made over time.

Still, one of the key choices you have when it comes to signing up to claim your benefits is when you start collecting. There are trade-offs involved, and those trade-offs mean there is rarely a perfect answer. With that in mind, these 10 things are ones you should consider before signing up for Social Security.

The $17,166 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $17,166 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

You can start taking Social Security retirement benefits as young as age 62. The longer you wait beyond that point, the larger each month’s payment will be, up until you reach age 70. Once you pass age 70, you no longer benefit from waiting to claim benefits. That gives you an eight-year age range in which to decide when you want to collect.

The key trade-off within that age range is one of time versus money. Do you want more money per month for fewer months, or a reduced steady stream of income that lasts for a longer time period? Of course, while your age and the resulting benefit level does play a role, it’s not the only factor that matters to most people.

ALSO READ: 3 Social Security Secrets for Even Bigger Checks

Whether or not you are still working plays a big role in deciding to collect benefits. If you’re below your full retirement age (which is between ages 66 and 67 if you haven’t reached it yet), your Social Security benefits are penalized if you collect while still working. In 2021, that penalty is much as $1 for every $2 you earn from work above $18,960 in the year.

In addition, if you can cover your costs of living from your paycheck and you haven’t yet reached 70, why not let your benefit continue to increase? Once you start collecting, you lock in the age-related component of your Social Security benefit. So why not let that grow as long as it can if you’re still covering your costs from paycheck?

You can collect benefits based on either your work record or your spouse’s. If you’re collecting on your spouse’s work record, your benefit is based on half your spouse’s primary benefit amount. That spousal benefit stops growing once you reach your full retirement age, but you can only claim spousal benefits if your spouse is already collecting his or her primary benefit. Therefore, there’s no benefit to waiting beyond your full retirement age if you’ll receive spousal benefits and your spouse is already collecting.

On the flip side, when one member of a married couple passes, the surviving spouse generally gets the larger primary benefit amount of the two members of the couple. As a result, if you’re both the higher-earning and older spouse in a couple, it might make sense for you to wait longer in order to improve what your spouse receives after you’ve passed.

If you’re not working, you need to cover your costs from somewhere. That money could come from places like your savings, a pension, the proceeds from selling your own small business or from downsizing your home, or deferred compensation plans from your former job. If you’ve got sufficient resources to cover your costs, then you can afford to wait until later to get your Social Security payment.

If, on the other hand, you weren’t expecting to retire as early as you did, you may need to tap your Social Security benefit earlier than you’d like just to make ends meet. That’s certainly a far better option than starving today in order to hold out for the potential of more tomorrow, if you make it that long.

ALSO READ: Here's the Easiest Way to Estimate Your Future Social Security Benefits

Your Social Security benefits will generally last the remainder of your life. Whether you get more over your lifetime by starting early or later depends on how long you live. Your crystal ball is at least as good as mine is, but if your health is such that you don’t expect a long retirement, you might think about claiming early in order to enjoy what you can while you can.

The crossover point is generally somewhere between your mid-70s and early-80s, but the lifetime benefit total isn’t the only thing that matters. Aside from healthcare needs, people tend to spend less the deeper into their retirements they get. So also consider how useful that larger chunk of money will be for you later in your retirement versus having a smaller amount earlier where you can enjoy it more.

The $17,166 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $17,166 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

One key benefit that Social Security offers is that its payments can adjust upward when inflation rears its ugly head. Indeed, the 2022 inflation adjustment will be a whopping 5.9%, which is the highest rate in decades. Your annual Social Security inflation adjustment is based on applying that increased rate to whatever your benefit level happens to be. The bigger your current check, the larger the Social Security inflation adjustment will be; therefore, it pays to wait if you’re worried about inflation.

Say you were born in 1960 or later, and thus your Social Security full retirement age is 67. If you start at age 62, your base check would be worth 70% of your full retirement age benefit. If you start at age 70, your base check would be 124% of your full retirement age benefit. For every $1,000 of your full retirement age benefit amount, your 2022 inflation adjustment would be $41.30 if you started collecting at age 62 or $73.16 if you started collecting at age 70. And every year, that difference will compound.

Once you reach age 72, you are required to begin taking money out of nearly all qualified retirement accounts that you own, except for your own Roth IRA. Those required minimum distributions are based on your age and the balance in the account. The bigger the balance, and the older your age, the larger your mandatory distribution. This can cause tax headaches -- and raise your Medicare premiums -- simply from moving money from one of your pockets to another.

To mitigate those risks, many people will start converting money from their traditional retirement accounts to their Roth IRA early in their retirements. By doing so, they accept a smaller tax bill now in order to reduce potentially even bigger tax and cost headaches later. Those Roth IRA conversions are most efficient if you have money outside of your retirement accounts to use to pay the conversion taxes.

By taking your Social Security on the earlier end of the eligibility timeline, it could give you extra cash flow to cover those conversion taxes, and thus help you out later.

ALSO READ: Want to Keep More of Your Social Security Benefits? Make These 3 Moves

As a good rule of thumb, money you need to spend in the next five years does not belong in the stock market. So if you’re retired and living off your investments, you’ll want five years of the costs your portfolio will need to cover outside of stocks.

By collecting Social Security earlier, some of your expenses can be covered by that income instead of by your investments. That will allow you to keep more of your money in stocks earlier in your retirement and for longer, which could enable you to spend a higher total lifetime amount if your investing is successful.

The trade-off, of course, is that you’re giving up the guaranteed boost from Social Security from waiting for the potential boost from having more invested by claiming your Social Security earlier. As a result, this is a trade-off that’s likely to be more worth taking if you’re comfortable as an investor than if you aren’t.

According to its most recent Trustees Report, Social Security’s trust funds will run out of money by 2034, slashing benefits by nearly a quarter. As if that weren’t enough, there’s good reason to believe that the strong inflation adjustment for 2022 might lead to those trust funds emptying even sooner. While it’s likely that Congress will patch the program before those trust funds empty, those patches will likely involve some combination of higher taxes and/or lower benefits.

If you’re worried that the patches either won’t come or that you’ll end up paying for them anyway, then it could make sense to take what you can get while you’re able to do so. Just recognize that if you’re really worried about Social Security’s future, you should also start investing what you can while you can to help cover the gap you’re expecting. Money in your pocket and your control has much more flexibility for you than money in Social Security’s hands, and it could wind up being worth more to you as well.

On average, Social Security replaces around 40% of a retiree’s income. If you have a higher income, it will actually replace less than that, due to the “bend points” in its benefit formula. If that is not sufficient to cover your costs, then you will need to also rely on other sources of cash to fund your retirement. If your pension and/or savings is large enough, then you can afford to take Social Security early and still have a financially comfortable retirement.

If it isn’t, then you might want to figure out if you can work a few more years before pulling the trigger. By waiting until closer to age 70, your Social Security monthly benefit will be higher, your pension might still increase, you can save a bit more, and your investments will still have the opportunity to compound. That combination could be enough to turn what would otherwise be a very tight retirement into a more financially comfortable one.

The $17,166 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $17,166 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

When it comes to deciding when to take your Social Security, there are few perfect choices. The easy ones are to start Social Security if you’re at least 70 and haven’t taken it yet, and to not start Social Security if you’re below your full retirement age and still working. Beyond that, you face trade-offs within the program and when considering Social Security in the context of the rest of your life.

The upside to that reality is that it also means that there are few choices that are absolutely the wrong ones to make. So consider these 10 factors when making your decision, and chances are that the choice you make will be a reasonably decent one for you.

The Motley Fool has a disclosure policy.