Social Security benefits are an important factor in retirement planning. Unfortunately, many Americans start collecting their payments too early, potentially costing them tens of thousands of dollars over time. For most people, it pays to hold off. Let’s take a look at some options:
STRATEGY 1: Start benefits as early as age 62.
Filing early may be a necessity for some, and could make sense for people with limited life expectancy. Nearly half of all filers begin collecting at age 62. However, doing so will result in a permanent reduction in benefits of 25-30%.
STRATEGY 2: Wait until Full Retirement Age (FRA) to receive your full benefit.
Your FRA is between 65 and 67, depending on your birth year (see chart). Your benefit will be based on your average earnings over 35 years. So, if your current earnings are higher than your average, your benefits will increase with each year you wait to collect.
STRATEGY 3: Wait to claim until age 70.
Your benefit increases 8% for each year you wait to collect beyond your FRA. That’s a pretty good guaranteed return. If you and your spouse expect to live for 10 years or more, and don’t need the benefit immediately, this is likely the best choice.
How Long Will You Live?
Estimating your life expectancy may seem tricky. Your current health and your family history can provide some guidance. Your doctor may also be able to advise you.
In general, an American man who reaches the age of 65 has a better than 60% chance of living to 80. Women live even longer, on average. About one out of every four 65-year-olds today will live past age 90. (ssa.gov)
Remember our three Social Security strategies? The chart below evaluates each strategy based on life expectancy.
STRATEGY 1: If you collect at age 62 and die before age 76, you will come out ahead.
STRATEGY 2: If you collect at FRA (age 66) and you die before age 78, you will come out ahead.
STRATEGY 3: If you wait till age 70 and you live at least to age 80, you will come out ahead.
social security payouts: when will you break even?
Source: JP Morgan. Break-even calculated using the Social Security Administration calculator for beginning values at each age. Assumes maximum benefits are received for individuals turning 62 and 1 month, 66 and 70 in 2015 and assumes the benefit will increase each year based on the Social Security Administration 2014 Trustee’s Report “intermediate” estimates (starting at 1.7% in 2015 and gradually rising to 2.7% in 2020). Monthly amounts without the cost of living adjustments (not shown on the chart) are: $2,014 at age 62; $2,713 at age 66; and $3,606 at age 70.
How Should You Decide?
It’s important to consider how Social Security benefits will fit in with the rest of your retirement plan, and to make sure you consider all of your options. Some factors everyone should consider include:
1. Cash flow needs
More than a third of U.S. workers have not saved anything for retirement, and many others haven’t saved enough. If you have set aside enough money to cover your daily expenses, you’ll have more flexibility to defer your benefits and potentially reap larger payments over the long term.
2. Life expectancy/family history
Chances are good that you will live into your 80s or even 90s. The longer you live, the bigger the payoff from waiting until age 70 to begin receiving benefits. Remember to consider your spouse’s longevity, too.
3. Tax rates, now vs. later
Depending on your other income, as much as 85% of your Social Security benefits may be taxed. If you anticipate a sharp increase or decline in income after age 62, tax considerations may affect your decision on when to claim benefits.
Strategy for Couples
Married couples, and even divorced couples, can often take advantage of spousal and survivor benefits. It’s important for couples to consider their Social Security choices together, not as individuals. Every couple is different, however, and your optimal strategy will be affected by:
- Age differences
- Differences in your individual earning histories
- Combined longevity expectations
- Cash needs
- Dependent children
- Overall long-term plan
In general, a spouse can take the greater of their own benefit or 50% of their spouse’s benefit. This also applies to ex-spouses who were married for at least 10 years, and not currently married. Widows and widowers can also receive 100% of their deceased spouse’s benefit and can file as early as age 60. If you have children later in life, you may be able to claim Social Security benefits for them as well.
Where Should You Start?
Start by reviewing your statement of benefits. Social Security mails you a statement every 5 years. You can also get a copy online at: www.ssa.gov/myaccount.
Up to 3 months prior to your start date, you can file for benefits online at www.socialsecurity.gov or by calling 800-SSA-1213.
Your Paracle advisor is a great source of information, and we’d be happy to help you with your decisions.