Important Considerations Before You Start Receiving Payments
The decision about when to begin taking Social Security is a very personal one that varies based on each individual’s specific situation. Some people benefit more from starting as early as possible, while others are wise to delay their payments. In order to arrive at the best decision for you, it’s important to understand your options. Here, we provide an overview to help you get started.
Social Security – The Basics
While you have the option to begin receiving Social Security payments as early as age 62, you will not be eligible for full retirement benefits until you reach your full retirement age (FRA), also known as normal retirement age (NRA). FRA is based on the year you were born. For every year after your FRA that you delay receiving benefits, you will receive a higher benefit amount. After age 70, the benefit increase stops, so there is no reason to delay past age 70. The benefit you receive at FRA is known as your primary insurance amount (PIA). To understand your projected benefit amounts, create a mySocialSecurity account and use the retirement calculator to illustrate the difference in benefits if taken at age 62, FRA and age 70.
It is important to understand that if you start receiving Social Security prior to your FRA, your benefit will be less than your PIA. This is a permanent reduction. However, if you wait to begin payments until after your FRA, your benefit amount will be greater than your PIA. In other words, the amount you receive when you first start your benefits is the amount you will receive for the rest of your life. The following table helps illustrate the effect of early versus delayed Social Security benefits:
Source: https://www.ssa.gov/OACT/ProgData/ar_drc.html
For example, if you were born in September 1969 and wish to begin receiving benefits in December 2033 (age 64 and three months), your benefit will be 81.67 percent of your PIA. Access this calculator for information about your specific benefits.
When is the best age to start receiving benefits?
While the Social Security Administration offers a wide range of information, it does not make recommendations about when you should begin receiving benefits. To make the best decision based on your personal financial situation, consider the following questions:
Are you still working? If you plan on applying for Social Security while you are still working, there are limits on how much you can earn each year between age 62 and your FRA and still receive your full Social Security benefits.
For example, if you are age 62 and work for the entire year, $1 is deducted from your benefit for every $2 you earn above the annual limit. In 2020, that limit is $18,240. When you reach your FRA, those additional earnings will be used to recalculate your monthly benefit. After you reach your FRA, your earnings do not affect your benefits, regardless of how much you earn.
What is your life expectancy? If longevity runs in your family, your retirement time horizon has the potential to be very long, so waiting until age 70 to receive benefits may be beneficial. On the other hand, if your health is poor, you may consider starting your benefits early.
Will you still have health insurance? Will your or your spouse’s employer still provide health insurance coverage after you retire? Most people are not covered by Medicare until age 65, so be sure to plan for your healthcare costs if you decide to retire before then.
As a reminder, even if you still have employer-provided coverage, it’s still important to enroll in Medicare three months before turning age 65. You do not have to apply for Medicare and Social Security at the same time, so it’s perfectly fine to apply for Medicare at age 65 and wait a few years before applying for Social Security.
Are you eligible for benefits on someone else’s record? If you qualify as a widow/widower or a surviving divorced spouse, you may choose to apply for survivor benefits and delay your own retirement benefit until later. You may be eligible to receive up to one half of your spouse’s FRA benefit, not including any delayed retirement credits he or she may receive. If you begin taking benefits prior to your FRA, the amount will be permanently reduced, and your benefits may also be impacted by the same earnings test described in #1 above.
(Side note – Did you know that when you start receiving your Social Security benefits, some family members may also qualify to receive benefits on your record? Learn more here.)
Do you have other income to support you if you decide to delay taking your benefits? You may wish to delay taking Social Security until you reach age 70 in order to take advantage of the delayed retirement credits. This can be a wise move if you have other income or assets to support you in the interim.
If you don’t need your benefits now, you may consider taking the monthly payment and investing it rather than spending it. Keep in mind, however, that your FRA benefit increases by approximately 8 percent each year you delay, so your investment would need to earn more than that in order to make financial sense. If you are eligible for an early retirement benefit from your employer, keep in mind that many pensions can start early (age 55 or 60) but the benefit will stop automatically at age 62, with the assumption that you will apply for Social Security benefits at that time. Other pensions don’t begin until age 65 and pay a benefit for life. This is why it’s important to understand how your employer’s retirement benefit works and to take that into account when making retirement income projections and deciding on the best age to begin taking Social Security. Choosing when to begin your retirement benefits is an important personal decision that requires careful research and planning.
At Creative Planning, we work with clients to plan for a wide range of retirement scenarios, with Social Security benefits playing an important role. If you would like assistance in evaluating your retirement options, or if you have any other questions regarding your personal financial situation, please contact us.
