Key Takeaways
- Social Security benefits vary depending on when you claim, starting as early as age 62 or delaying until age 70.
- Claiming benefits early helps protect portfolios from market risk, while claiming benefits later helps reduce tax exposure and helps increase income security.
- Timing impacts spousal benefits and should be customized to health, longevity and income goals.
There are many important financial decisions to make as you plan for retirement. One of those decisions is determining the optimal timing to begin taking Social Security benefits. While you can start taking Social Security as early as age 62, there may be some advantages to waiting until you’re older.
Key Factors in Deciding When to Take Social Security
Following are five important considerations to keep in mind as you decide when to take Social Security.
How your age impacts your benefits
While you can start receiving Social Security benefits as early as age 62, you won’t be eligible to receive full retirement benefits until you reach your full retirement age (FRA), which is between age 66 and 67, depending on the year you were born. Your monthly benefit payment increases by approximately 8% each year after FRA that you delay taking benefits (up to age 70).
The benefit you receive at FRA is referred to as your primary insurance amount (PIA). Once you begin taking benefits, you’ll receive your PIA amount each month for the remainder of your retirement (adjusted annually for inflation). If you receive benefits before reaching FRA, you’ll receive less than your PIA but have the potential to receive payments for a greater number of months. If you wait until age 70 to begin receiving benefits, you’ll receive more than your PIA each month, but you’ll have fewer months of payments.
To determine your estimated Social Security benefit at various ages, use our Social Security Retirement Calculator.
Why taking benefits early can help protect your portfolio
While taking Social Security early results in a reduced monthly benefit amount, doing so may help preserve the growth potential of your investment portfolio. For example, if you retire at age 62 but don’t start taking Social Security until age 68, you’ll need to rely on distributions from your retirement savings to pay for your lifestyle expenses during your first six years of retirement. That means those assets are no longer invested in the markets and can no longer grow to help keep up with inflation.
A more severe risk arises if you experience a significant market drop in those first six years of retirement. Thanks to sequence of returns risk, this can mean you’ll need to sell more shares in order to receive the same monthly income amount. In addition to realizing a loss on those shares, you’re removing them from the market, and they can no longer benefit from a future recovery, which can result in a loss that’s impossible to recover from.
Receiving Social Security benefits early can help minimize the amount you withdraw from your retirement accounts, allowing more assets to continue growing over time.
How delaying benefits may reduce taxes
While taking Social Security early can help protect the value of your portfolio from market volatility, taking Social Security late can help reduce your tax exposure. That’s because Social Security payments could be subject to tax, based on your annual “combined income,” which is determined by using the following calculation:
Adjusted Gross Income (AGI) + Non-Taxable Interest + ½ of Social Security Benefit = Combined Income
Your AGI includes income from all taxable sources, such as wages; withdrawals from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s; and taxable investment income (such as stock dividends and interest from taxable accounts). Non-taxable interest includes income from municipal bonds. Although free from federal and (possibly) state income taxes, municipal bond income is counted when calculating the taxable amount of Social Security.
If you face high taxes based on your combined income, it may make sense to delay Social Security and draw from your retirement savings during the first few years of retirement. By drawing down your taxable assets, you may be able to reduce your combined income enough to also reduce your Social Security tax exposure.
Life expectancy and choosing the right timing
Your life expectancy is an important factor to consider when deciding when to begin receiving Social Security. If you suffer from a chronic illness or have a family history of health issues, you may want to begin receiving Social Security at a younger age, even if it means you receive less each month. On the other hand, if you’re healthy and have a family history of longevity, you may want to delay taking Social Security in order to maximize your monthly payment amount.
Spousal benefits and survivor considerations
Social Security timing may impact the amount your spouse receives after you die, which is why it’s important to consider your spouse’s needs and benefits eligibility when determining optimal timing. Typically, a surviving spouse receives the higher of the two spouses’ benefits. This means the higher-earning spouse could maximize the surviving spouse’s benefits by waiting until after FRA to begin drawing Social Security.
