Choosing the Best Time to Claim Social Security Benefits
Fitting the social security piece into your retirement puzzle can be a little tricky as there are a number of factors that can influence the amount of the benefit you receive. These include whose earnings record you will file on—yours, your spouse’s, or even your ex-spouse’s—and at what age you will begin claiming benefits.
What makes your initial decision regarding social security so important is that you don’t have many options when it comes to changing your election. The Social Security Administration understands that unexpected life changes occur and allows for one lifetime withdrawal to be filed, but the application to cancel must be filed within twelve months. Once that twelve months has lapsed, you are essentially locked into the decision made in your first year.
Full Retirement Age (FRA)
The social security administration defines Full-benefit Retirement Age (FRA) as 67 for anyone born after 1960.[i] So, essentially, there are three options when it comes to choosing a benefits timeline: before FRA, at FRA, and after FRA. Each has its pros and cons.
Claiming before full retirement age means that you could potentially receive benefits for a longer duration of time depending on your health and estimated longevity; however, the government realizes this and reduces early benefit amounts accordingly. The earliest an individual can begin claiming benefits is age 62, but the benefit amount is reduced by 5/9 of one percent for each month before full retirement age (up to 36 months)[ii].
Delaying your social security claim, on the other hand, increases your benefit amount. This is known as receiving a delayed retirement credit. With every year you wait to collect social security after your full retirement age, your payments increase by 8% until age 70.[iii] But, if you are in poor health or in need of the income at an earlier age, delaying may not be in your best interest.
To claim or to delay?
Of course, the simple answer seems to be to delay for as long as possible to receive the maximum rewarded amount. Working longer, especially if you are in your peak earning years, will not only increase your future benefit amount by boosting your lifetime earnings record (which is used to calculate[iv] your benefit amount), but also by allowing you to take advantage of the delayed retirement credit.
However, there are many things that can get in the way. There are unforeseen circumstances that may not leave you in control of when you retire. For example, you or your spouse could suddenly develop health issues or be forced out of work due to company-related changes.
Survey the Whole Picture
Of course, the final decision about when to claim benefits is not one that should be made in isolation, but in the context of your overall financial framework. You will have to weigh the relative merits of drawing funds from each of your pooled resources to decide how to maximize your total post-tax income.
For example, do you net more income by drawing down on other resources and delaying benefits, or taking benefits early and leaving your other funds invested? The answer isn’t one size fits all and will largely depend on how best to use your available resources to maximize the longevity of your retirement income. Consult with your financial professional before making major money moves that could have long-term repercussions.
Deciding when to claim benefits is a complex issue, but one that you don’t have to tackle alone. At Uncommon Cents Investing, we help you make sense of your social security options and incorporate them into your overall retirement picture.
Interested in learning more about our retirement planning and wealth management services? We invite you to take a look around our site and get to know us. If you like what you see, feel free to schedule a call on our calendar to get your questions answered or concerns addressed. Thanks for stopping by! We look forward to getting to know you.
[i]https://www.ssa.gov/OACT/quickcalc/early_late.html 2 December 2020
[ii] Ibid. 2 December 2020
[iii] Ibid. 2 December 2020