What You Should Know Before Claiming Social Security
Deciding when to claim Social Security is one of the most consequential financial decisions you will make in retirement. The difference between claiming early, at full retirement age, or waiting until age 70 can amount to hundreds of thousands of dollars over your lifetime. Before you file, consider these four critical factors.
What’s Your Full Retirement Age?
Your full retirement age (FRA) is the age at which you are entitled to receive 100 percent of your Social Security benefit. For most people retiring today, FRA is between 66 and 67, depending on the year you were born.
You can claim Social Security as early as age 62, but doing so comes with a significant reduction in your monthly benefit. On the other hand, if you delay claiming past your FRA, your benefit increases by approximately 8 percent per year until age 70.
To put this in perspective, consider a worker whose benefit at full retirement age would be $2,200 per month:
- Claiming at age 62: approximately $1,650 per month
- Claiming at FRA (age 66-67): $2,200 per month
- Waiting until age 70: approximately $2,900 per month
That is a difference of $1,250 per month between the earliest and latest claiming ages. Over the course of a 20-year retirement, that difference adds up to hundreds of thousands of dollars.
How Long Will You Live?
The optimal time to claim Social Security depends heavily on how long you expect to live. If you claim early, you receive smaller payments over a longer period. If you wait, you receive larger payments over a shorter period. There is a breakeven point at which the total benefits received are roughly equal regardless of when you claimed.
Here is how the total lifetime benefits compare at different ages, using our example of a $2,200 FRA benefit:
Total benefits received by age 75:
- Claimed at 62: approximately $257,400 (13 years of $1,650/month)
- Claimed at FRA (67): approximately $211,200 (8 years of $2,200/month)
- Claimed at 70: approximately $174,000 (5 years of $2,900/month)
Total benefits received by age 80:
- Claimed at 62: approximately $356,400 (18 years of $1,650/month)
- Claimed at FRA (67): approximately $343,200 (13 years of $2,200/month)
- Claimed at 70: approximately $348,000 (10 years of $2,900/month)
Total benefits received by age 85:
- Claimed at 62: approximately $455,400 (23 years of $1,650/month)
- Claimed at FRA (67): approximately $475,200 (18 years of $2,200/month)
- Claimed at 70: approximately $522,000 (15 years of $2,900/month)
As you can see, if you live to age 75 or younger, claiming early produces the highest total payout. But if you live into your mid-80s or beyond, waiting until age 70 produces significantly more total income. Since the average 65-year-old today can expect to live into their mid-80s, delaying benefits is often the better financial decision for those in good health.
How Much Have You Saved for Retirement?
Social Security was never intended to be the sole source of retirement income, but for many Americans, it is their primary source. On average, Social Security replaces about 40 percent of pre-retirement income. For most people, that is not enough to maintain their standard of living.
If you have significant retirement savings in 401(k)s, IRAs, pensions, or other investment accounts, you may have the luxury of delaying Social Security to maximize your benefit. You can use your savings to bridge the gap between retirement and age 70, allowing your Social Security benefit to grow.
A common rule of thumb is the 4 percent rule, which suggests that you can withdraw 4 percent of your retirement portfolio in the first year of retirement and adjust for inflation each year thereafter, with a reasonable expectation that your savings will last 30 years. If your savings are sufficient to support you under this rule until age 70, delaying Social Security can significantly increase your total lifetime income.
On the other hand, if your savings are limited and you need income immediately, claiming Social Security earlier may be necessary, even if it means a reduced benefit. The key is to understand the tradeoffs and make an informed decision based on your complete financial picture.
Will You Need to Work?
If you plan to continue working while receiving Social Security benefits before your full retirement age, be aware that your benefits may be reduced. The Social Security Administration applies an earnings test to beneficiaries who have not yet reached FRA.
For 2021, if you are under full retirement age for the entire year, Social Security deducts $1 from your benefits for every $2 you earn above $18,960. In the year you reach full retirement age, the deduction is $1 for every $3 you earn above $50,520, but only for earnings in the months before you reach FRA.
Once you reach full retirement age, there is no penalty for working, and your benefit is recalculated to account for the months in which benefits were withheld. However, the reduction in benefits before FRA can be a significant factor if you plan to work and claim Social Security simultaneously.
It is also worth noting that your Social Security benefits may be subject to federal income tax depending on your total income. If your combined income exceeds certain thresholds, up to 85 percent of your Social Security benefits could be taxable.
The decision of when to claim Social Security is deeply personal and depends on your health, financial situation, and retirement goals. There is no single right answer for everyone.
If you need help understanding how Social Security fits into your overall retirement and estate plan, contact our office today.
