One of the biggest questions you will face as you get closer to retirement is when to start collecting your Social Security retirement benefits. The decision is much more complicated – and important – than you may think.
Not only will this decision affect how much income you will receive during retirement, it affects how long your assets will last, the amount of benefits your family will receive, how much tax you will pay, and more.
As a result it’s important that you make the best decision for you and your family, so before you jump into when to take your benefits, you should take some time to learn more about how Social Security works and your options when it comes to applying for retirement benefits.
At What Age Can You Start Collecting Social Security?
According to the Social Security Administration, half of all Americans start taking Social Security at age 62 and 75% of Americans take Social Security before their full retirement age.
There are three important dates to know when determining the best time to start collecting benefits.
Age 62 is the earliest that you can receive Social Security retirement benefits. However, if you choose to receive benefits before your full retirement age, those benefits will be reduced (a fraction of a percentage for each month before you reach full retirement age) up to 30%.
Full retirement age is the age that you will receive your full retirement benefit under Social Security. Your full retirement age will depend on when you were born. People born in 1937 or earlier were able to collect full retirement benefits at age 65. The full retirement age was increased for people born after 1937, all the way up to age 67 for those born in 1960 or later. For example, if you were born in 1940 your full retirement age is 65 and 6 months, if you were born in 1950 your FRA is 66 years and if you were born in 1960 your FRA is age 67.
The final date to keep in mind is age 70. If you wait to collect your benefits beyond your full retirement age, your benefits will increase 8% per year (for those born in 1943 or later). However, at age 70 your benefits will no longer increase even if you continue to delay taking benefits. As a result, it does not make sense to wait beyond age 70 to start your retirement benefits, even if you are still working or don’t need the money.
What Factors Should Be Considered When Deciding When to Start Collecting Benefits
Now that you know when you can start collecting benefits, it’s time to start thinking about when you should start collecting benefits.
The decision of when to take Social Security is both a personal and a financial one. You should ask yourself several questions before you make a decision:
- What are your finances like? Do you need the money now or can you wait a few years?
- How long do you plan on working? Do you plan on working part time after you “retire”?
- How is your health? What is your family longevity like? Are your parents, grand-parents and other relatives still living?
- Are you single or married? Do you have dependent children?
- What tax bracket are you in? Do you have substantial other income?
All of these questions will play a part in your decision on when to take Social Security and will be discussed in more detail below.
I Can’t Afford to Wait… I Want My Social Security Now!
What are your finances like? Can you afford to wait a few years to start your benefits or do you need money now?
According to the SSA, half of all Americans start taking Social Security at age 62. Many of these people opt to start benefits as early as possible because they need the money for basic living expenses. For these people, starting early means they receive more years of benefits which can help early on in their retirement.
Unfortunately, the trade off for starting benefits early is that you receive a smaller benefit, for life. So while you receive more years of benefits, the smaller benefits increase the risk that you will run out of money during your lifetime, as you will need to tap into your savings more often to help with living expenses.
So while applying for benefits as soon as you’re eligible may sound like a good idea if you are struggling to pay the bills, you should consider your health, family longevity, and other factors to make sure that starting early is the right strategy for you.
How Long Do You Plan on Working?
You can work and receive Social Security benefits at the same time; however, if you are under the full retirement age, the amount you can earn is limited. If you earn more than the limit you will be forced to pay back some of your benefits.
So how much can you earn and still collect benefits if you are under the full retirement age? In 2012, you can earn up to $14,640 before you will be penalized. Once you reach the limit, then Social Security will withhold $1 for every $2 you earn over the limit.
While the benefits you have to pay back aren’t lost forever (your future benefits will be adjusted for the amount you have to pay back), this could put a dent in your budget if you’re not aware of the rules.
How Healthy Are You?
Most of my clients tell me there’s no way they are going to live until age 100 or even age 90. However, the life expectancy for Americans has increased dramatically since Social Security was first implemented. When retirement benefits were first paid out, the average life expectancy was 62 and workers weren’t eligible for benefits until age 65. Now the average age at death for Americans is early to mid-80s!
Numerous studies have shown that the longer your life expectancy the more important it is to delay collecting Social Security. Before you apply for retirement benefits, please consider your health as well as your family’s history of longevity. If your parents and grandparents lived into their 80s and 90s you need to assume that you will too.
On the other hand, if your health is failing and you do not expect to live into your 80s, you will probably be better off starting your benefits early.
What is Your Marital Status?
Your Social Security benefits don’t just affect you. If you are married or if you have any dependent children, they may collect benefits based on your record some day. Spouses (including widows and divorced spouses in some cases) as well as dependent children may collect benefits based on your benefit.
For example, widow’s benefits are based on the amount you are receiving when you pass away, so it’s important to maximize your benefits for everyone’s sake, not just your own. If you take early retirement benefits, then not only are your benefits reduced for life, but any surviving or other family benefits will also be reduced for life.
If you are single and have no-one who is financially dependent on you, then it might make sense to collect benefits early, but if you have a spouse and/or dependent children you might want to hold off on collecting benefits, at least until you reach full retirement age.
What Tax Bracket Are You In?
Something that many people fail to consider is the tax impact of starting your retirement benefits early. While most people pay little to no income taxes on their Social Security benefits, if you start collecting while you are still working, or if you have (substantial) other income, a portion of your benefits could be taxable.
How much of your benefits are taxable depends on your total income and your marital status. Generally, if Social Security is your only income, it will not be taxable. However, if you receive income from other sources, such as a job, investments, etc., your benefits could be taxable if half of your Social Security benefits plus your other income is over these base amounts:
- $32,000 for married couples filing jointly
- $25,000 for single, head of household, qualifying widow/widower, or married individuals filing separately from their spouse (if they did not live with their spouse at any time during the year)
- $0 for married individuals filing separately who lived together during the year
There are actually two tiers of income. These are the base amounts, at which point if you are over then up to 50% of your benefits will be taxable. If you have income above the additional tier ($34,000 for single taxpayers, $44,000 for married taxpayers filing jointly), then you will pay taxes on up to 85% of your benefits.
If you are in a high tax bracket, then the tax bite for taking benefits while you are still working could be substantial, offsetting some of the benefits of taking early retirement benefits. If you expect Social Security to be your main source of income and do not plan on working while you collect benefits, then taxes should not be an issue.
Where to Get More Help
As you can see, when to apply for Social Security retirement benefits is a complex decision that involves many factors, so it should not be taken lightly. It is a good idea to run calculations based on different scenarios to help make the best decision for you. Here are several resources to help you:
SocialSecuritySolutions.com offers several free and paid tools to help you including free calculators, individualized reports, and personal consultations.
AARP and socialsecurity.gov both offer free calculators to estimate your benefits and run “what-if” scenarios.
You might also consider speaking with a fee-only financial planner (try NAPFA.org) who can advise you not only on when to take Social Security but on other retirement questions as well.
Once you’ve determined the best time for you to start collecting Social Security, just head on over to socialsecurity.gov and click on “Apply online for retirement benefits”.
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