When Is The Right Time To Take Social Security Benefits?

April is National Social Security Month, and what better way to kick-off this important topic than with a discussion on claiming Social Security benefits?

Social Security is an important part of many retiree’s income streams with the Social Security Administration estimating it to cover nearly 40% of expenses in retirement. This number will fluctuate depending on your tax bracket, work history, tax obligations, and other income channels. But this still leaves Social Security as a major player in retirement income. 

Let’s take a look at the basis of how your benefits are calculated and then dig deeper into your options for enrolling in benefits. 

What is Social Security?

Social Security is a government program put into place by President Roosevelt in August of 1935. The program was initially designed to help supplement income for retired workers over age 65. It has since evolved with changing policy and requirements but still remains a system that offers support for retired workers, their families, and those with disabilities.

Social Security is funded through the Federal Insurance Contributions Act (FICA) tax, which is a dedicated payroll tax. You and your employer both pay 6.2% of your paycheck up to the taxable maximum which is $137,700 for 2020. Self-employed folks are required to pay the full 12.4%, with half of that being tax-deductible. 

This pay-as-you-go system allows you to contribute money while you are working and distribute money when you retire. 

Retirement looks different for each person and can factor into when you decide to enroll in Social Security benefits. The age at which you decide to enroll is crucial and plays an integral role in the amount of your monthly benefit. 

In general, there are three main phases of your retirement when you can start to collect benefits:

• Early at 62
• Full retirement age
• Late at 70 (or later)

There are benefits and drawbacks to each option, so it is important to look at your Social Security benefits in context with your health, life expectancy, additional income streams, spouse, dependents, legacy, and overall retirement lifestyle goals in order to make the best decision for you. 

Now, we will dig a litter deeper into each of the three options to help give you a sense of what might make sense for you. Remember, this is just general advice. In order to understand the scope of your retirement needs, set up a call with us. 

Phase 1: Collecting at 62

The earliest time that you can claim Social Security benefits is 62. There are a few exceptions to this rule for those who are disabled, whose spouse or ex-spouse passed away, and for a qualifying child. Be sure to check out the SSA rules and conditions for each of these exceptions.

It may be tempting as soon as you blow the last candle out on your birthday cake on your 62nd birthday to run and claim your benefits. After all, you have been contributing to the program for most of your life and are quite possibly ready to move on to the next phase of your life. 

But, as the saying goes, you can’t have your cake and eat it too. 

By collecting Social Security at 62, your monthly benefit will be reduced by about 30% for the rest of your life. By cutting this benefit, you may be jeopardizing a significant portion of your potential retirement income. 

A loss in benefits is the primary drawback to claiming benefits early, but that isn’t the only factor to consider here. Your health and retirement lifestyle goals play a major role in this decision. For someone who isn’t in great health, it might make sense to start collecting the money early to enjoy the healthy years ahead as long as possible. 

Immediate cashflow need is another sound reason people collect early. Without working, you may not be able to afford to not get those monthly checks, even if they are reduced. Understand the other streams of income that you have in order to decide if you can wait until your full retirement age to collect. 

Phase 2: Collecting at full retirement age

The second option, and most popular, is to wait to collect benefits until your full retirement age (FRA). For those born in 1960 or later, full retirement age is 67. The SSA has a helpful table to help you find your FRA based on the year you were born. 

If your health, finances, and lifestyle allow, waiting to collect until FRA means that you are eligible for 100% of your monthly benefit. Claiming your full benefit may be able to help you do more in retirement than you would if those monthly checks dropped by 30%. Let’s take a look at a quick example to help. 

Lana has been in the workforce as a marketing executive for many years. Her full retirement age is 67, at which point she begins to collect her Social Security benefits. Since she waited, she received her full monthly benefit of $1500. Had she collected early at 62, that monthly benefit would have been reduced to $1050, causing a significant drop in her income. 

If you are able, waiting until your FRA can open up many more options for you in retirement. But there is still one more option to consider. 

Phase 3: Collecting at 70

Delaying your Social Security benefits until you are 70 is a popular strategy to consider. The longer you wait to enroll in benefits after your FRA, you receive delayed-credits that boost your monthly benefit. 

While you can wait to collect past 70, there is no additional financial incentive as the delayed-credits stop accruing at 70. 

By collecting at 70, you will increase your monthly benefit by about 25% over the course of your life. Let’s bring Lana back as an example. Remember, her full benefit is $1500 per month. If she delayed until 70, she could expect her benefit to increase to about $1875. This additional money could prove to be helpful for Lana to help her fulfill her goal to travel more in her golden years. 

Delaying benefits makes a lot of sense for people who are healthy and expect to live a long life and is also useful for married couples to maximize benefits. This extra monthly money can really improve quality of life, help to cover the rising cost of living expenses, and help achieve retirement lifestyle goals. 

But this option doesn’t make sense for every person. For some, waiting until they are 70 means that they aren’t in as good of health and can’t truly enjoy the extra funds that they waited so long to get. Others still may not want to wait to collect benefits after their full retirement age to put the money in their retirement lifestyle goals. 

Remember, collecting Social Security benefits is a nuanced process and combines a number of retirement factors in order to make the best decision for you. 

The bottom line

Social Security can be a big asset for many current and pre-retirees. Ensuring that you make the most of your benefit will require you to look at when you start collecting benefits and which option best aligns with the financial, health, and lifestyle aspects of your retirement plan. 

Here at Legacy Wealth, we are invested in guiding our clients to find happiness and success in retirement and beyond. Deciding when to collect Social Security is part of a larger question about your retirement goals and aspirations. We would love to help you bring that vision to life. Schedule a 15-minute call with us today.