When to Take Social Security, and When to Wait

If you qualify for Social Security because you paid into the system for at least 40 quarters — the equivalent of ten years — or you’re married to someone who qualifies, you’re eligible to begin taking benefits as soon as you turn 62.

But once the birthday celebrations are over, you have to decide whether it makes more sense to start collecting right away or to wait until you are older.

CRUNCHING THE NUMBERS

You’re eligible to collect the full amount to which you’re entitled, based on up to 35 years of contributions, if you wait until you reach what the Social Security Administration (SSA) defines as your full retirement age (FRA) or normal retirement age (NRA). That age was 65 for anyone born before 1938, increased gradually to 66 for people born between 1943 and 1954, and will increase gradually again to 67 for people born in 1960 and later.

The catch is that if you start collecting before you reach your FRA, your benefit is permanently reduced. The earlier you begin, the smaller the amount you receive, calculated on a monthly basis. For example, if you elect to take your benefits at 62, they’re reduced to 75% of your full benefit if your FRA is 66. And they’ll be reduced to 70% of that benefit if your FRA is 67.

On the other hand, if you wait until after your FRA to begin collecting, you receive a credit, in addition to your full benefit, that gets bigger every month you wait.

For example, for anyone born in 1943 or later, the credit is 8% a year, calculated on a monthly basis, up to age 70. After you reach 70, the base amount for which you’re eligible won’t increase any further. So there is no point waiting to begin receiving benefits past your 70th birthday.

GETTING OLDER, GETTING…OLDER

The thinking behind the SSA’s sliding benefits scale is that if you reach the average life expectancy for your age, you’ll receive more or less the same lifetime benefits regardless of when you start taking them. In other words, you can start sooner and collect less for more years, or start later and collect more for fewer years: In the end, your lifetime benefit averages out.

In reality, however, people are living and working longer than they have in the past. According to the Center for Disease Control’s National Center of Health Statistics, if you make it to 65, you can expect to live to 82 if you’re a man and to 85 if you’re a woman.

What’s more, as the SSA increases the retirement age at which you qualify for full benefits, it has also increased both the penalty for collecting early and the credits for postponing your payments. Taken together, these changes are upending the traditional assumption that it was smart to start taking benefits as soon as you became eligible, provided, that is, you were no longer working.

GETTING THE TIMING RIGHT

The key to figuring when it makes the most sense to start collecting your benefits is to calculate your break-even age. That’s the age beyond which you must live in order to come out ahead if you delay collecting benefits. If you think you have decent odds of living beyond that age, it may make sense to postpone.

To take a simplified example, let’s say you just turned 62 and your estimated benefit when you reach your FRA of 66 is $2,000 a month in today’s dollars. You would receive $1,500 a month if you started taking Social Security income today and $2,640 a month if you started at age 70. In that case, you’d need to live to about 80 1/2 to realize a higher lifetime benefit if you delayed rather than taking income at 62. And you would need to live to about 82 1/2 to do better than you would have had you started taking Social Security at 66.

You can find a variety of calculators online, including on the Social Security website (www.ssa.gov), that can help you estimate your break-even age. However, it’s important to keep in mind that there are many variables that these calculations don’t take into account, among them whether you’re still employed, whether your benefits will be taxed, and if you invest any of your monthly Social Security income.

A DIFFERENT KIND OF COLA

Another thing that isn’t factored into break-even calculations is the effect of cost-of-living adjustments (COLAs), or annual increases, in Social Security benefits. While COLAs, which are designed to offset inflation, are typically modest, they compound from year to year, adding significantly to the value of your benefits over the long term. That’s especially the case if you delay taking Social Security and are fortunate enough to live a long life: The bigger your monthly benefit is to start with, the bigger the impact COLAs can have on its value over years of compounding.

A PERSONAL CHOICE

While there’s no one time that’s right for everyone to begin taking benefits, there are some considerations that everyone should keep in mind. For example, if you have limited retirement assets and need the income, or if you have significant reasons to believe that you won’t live long enough to profit from postponing, then it’s clearly a good idea to take Social Security income early.

If you’re married, it’s also important to consider your spouse’s situation when deciding when to collect benefits. For example, if you are the higher-earning partner, you may want to wait until after you reach your FRA or 70, if that’s financially feasible. This can maximize your spouse’s lifetime income in the event that you die first, because he or she in most cases will be eligible to collect the same benefit to which you would have been entitled. But this is only one of many strategies to consider, so make sure to talk to an experienced financial adviser and to a Social Security representative to help you sort through your options.

As Social Security remains an important source of income for many people entering retirement, it becomes all the more imperative to make an informed decision to help maximize your lifetime benefits.


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