Two of the most important financial decisions people make are when to stop working and when to claim Social Security benefits. When it comes to deciding when to begin Social Security, there are essentially three choices:
- Take it early
- Wait until full retirement age (FRA)
- Wait even longer
According to the Social Security Administration (SSA), most retirees file for their benefits as early they can: 42.5 percent of men started taking Social Security benefits at age 62 in 2008, while 48.3 percent of women started claiming benefits at age 62. (Just 7 percent of men claimed benefits at age 63, and 6.9 percent of women claimed at age 63.)
Taking payments early may seem attractive
Most taxpayers feel that because they have been paying into the system for a long time, they want to claim their benefits as soon as possible. But that decision means receiving a smaller payment. Retirees are allowed to begin drawing Social Security benefits at age 62. However, according to the SSA, “full retirement age” — when you are eligible to receive full benefits — is 65 to 67. If you choose to start receiving benefits before you reach full retirement age, your check is reduced by five-ninths of 1 percent for each month before that age, up to 36 months. If you start more than 36 months before your normal retirement age, the benefit is further reduced by five-twelfths of 1 percent per month. Also, until full retirement age, SSA will deduct from you benefits $1 for every $2 you earn above the annual wage limit, which for 2010 is $14,160.
If you delay receiving benefits until after your full retirement age (but prior to age 70), you will receive a delayed retirement credit (DRC). The credit is prorated (.67%) for any month that you do not receive a benefit. DRCs increase the benefit for the retiree but not for the spouse. However, DRCs earned by the worker do increase the benefit payable to the surviving spouse.
There are several factors to consider when determining when to start receiving Social Security, including your cash needs, life expectancy, your spouse’s age and health, and whether or not you are still working. All should be taken into account. If you have sufficient financial resources, you can be flexible about when to start receiving benefits.
At what age will you ‘break even’ (or come out ahead) if you delay Social Security?
The break-even age depends on the amount of your benefits and the assumptions you use to account for taxes and the opportunity cost of waiting (investment return you could have made, inflation, etc.). The SSA and your Moneta Group advisor have several helpful calculators that can analyze your particular situation and help you estimate benefits.
Clearly, your life expectancy will greatly influence your decision. Theoretically, it should not matter when you start to receive your checks, provided that you have an average life expectancy. If you think that you will live longer than the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you are in poor health or have reason to believe you may not live a long life, you might decide to take your benefits as early as possible.
If you are the higher-earning spouse in your family, your ‘other half’s’ age and health is an important consideration. The amount of survivor benefits for a spouse who has not earned much during his or her working years could depend on the deceased, higher-earning spouse’s benefit—the bigger the higher-earning spouse’s benefit, the better for the surviving spouse. There are several different strategies that can be employed to take advantage of higher benefits.
What happens if you began receiving benefits and wish that you had waited?
If you previously elected to receive early Social Security benefits at a reduced rate, you have the option of paying back to the government what you have already received. You could then restart benefits at a later date to take advantage of a higher payout. Paying back prior benefits is similar to buying an annuity, except you do not have to pay any interest on the benefits you have already received and there are no fees. Whether it makes sense to take advantage of this option depends on your tax situation, age, and life expectancy. Of course, you also have to come up with the repayment money.
So what is the right decision?
Unless you have a crystal ball, there is no clear cut answer as to when to begin receiving Social Security. Taking Social Security early reduces your benefits, but it also means that you will probably receive monthly checks for a longer time. Taking Social Security later results in fewer checks over your lifetime, but the credit for waiting means each check will be larger. Each individual must take into account his or her unique situation. These decisions are important and have lasting consequences for the financial security of you and your family.
Your Moneta Family CFO can help you analyze your circumstances and make the best decision.
Katie Johnson, J.D.
Katie Johnson is the professional consultant for Brad Koeneman.
