Social security retirement benefits provide a major source of income for most retirees in the U.S. In fact, about 40% of retirees rely solely on social security income. So, it is important to know when to start taking it to maximize your benefit. The decision is basically a bet with the government on how long you are going to live. Therefore, like any bet, you should gather as much information as possible to move the odds in your favor.
Here’s what I consider are the two most important factors that you should consider before deciding when to start taking social security:
- Financial Needs: This should be looked at first because if you need the money, you can stop the analysis and just take the money at age 62. If you’re not sure, then the next step is to consider your retirement income sources. If you have a 401k, IRA, pension, savings, or plan to keep working, you might be able to delay benefits. However, if you plan on relying heavily on Social Security, starting benefits earlier could be necessary. If you can swing it, it definitely pays to wait, because your benefit increases by about 8% for every year you wait. That’s a huge difference in payments, especially extrapolating it out over twenty years or more.
- Life Expectancy: So, if you decided that you don’t need the money at age 62, then you need to analyze what your expected lifespan will be. If you have a family history of longevity, delaying benefits might be wise to maximize the total amount you receive over your lifetime. Conversely, if you have health concerns or a shorter life expectancy, taking benefits earlier ensures you get more money while you can.
I have run the numbers for a bunch of people with all different scenarios and I have found that the breakeven point for most people is between ten and twelve years. This is the number of years that it would take for the total of your payments starting at age 70 to equal the total payments received if started at age 62. That means if you think that you’ll live to 85 (15 years past age 70), which is the age that you receive the maximum benefit, then you should delay taking benefits until age 70 in order to get the most money over your lifetime.
You also want to consider if you want that extra income while you are younger, to use for things, such as traveling, that you might not be able to do when older.
If you’re still not sure what to do after looking at the two factors above, here are some additional things to consider as well:
- Work Status: If you continue working past your full retirement age (age 67 for anyone born after 1960), your benefits might be reduced until you reach FRA. However, your benefit amount will be recalculated later to include those working years.
- Marital Status: Married couples have additional considerations. The benefit you receive might depend on your spouse’s earnings history and claiming decisions.
- Tax implications: Social Security benefits can be taxed depending on your total income. Here’s the details: http://www.ssa.gov/planners/taxes.html
- Healthcare coverage: If you retire before 65, you might lose employer-provided health insurance and need to consider alternatives.
Everyone’s situation is unique, so it is worth it to take the time and figure out the best strategy to maximize your social security retirement benefit. By weighing the factors listed above and using the resources available on the Social Security Administration’s website, www.ssa.gov, you can make an informed decision about when to claim your Social Security benefits.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassemanagement.com
