Do You Know When to Start Taking Social Security? The Answer May Surprise You.
By David J. Haas, CFP®
February 22, 2023
Social Security can be very confusing. There are so many different rules for different family situations. Things change when your spouse dies or if you get divorced. The most important question you probably have about Social Security is when to start taking it. Some of your friends might have started already and they ask when you will be starting your benefit. This article should help you understand the answer to that question.
Social Security Basics
Social Security actually has two different funds, a disability fund which pays an income when an individual is completely disabled and unable to work. The other fund is the Old Age & Survivors fund. This fund pays benefits to eligible workers upon their retirement or under some other special circumstances.
Who is Eligible?
Workers and their non-working spouses are eligible for Social Security if they have worked and paid into the fund at least 10 years. This means working at a job or business where you paid FICA or self-employment taxes. While you are allowed to start taking reduced retirement benefits at age 62, there is a magic age, called Full Retirement Age (or FRA). This is the age where you get your full retirement benefit which is calculated based on the highest 35 years of income. FRA used to be age 65 for everyone, but as part of a deal to shore up the Social Security trust fund, this age gradually increases to age 67 depending on when you were born. If you were born between 1943 and 1954, your FRA is 66. For birth years starting in 1955 and ending in 1959, your FRA gradually increases two additional months for each additional year. If you were born in 1960 or later, your FRA will be age 67.
How Much do You Get?
When you are married, you can get a benefit payment that is either based on your own work history or ½ of your spouse’s, depending on which is higher. This calculation will be done automatically by Social Security. If you are divorced and you were married for at least 10 years and you have not remarried, you will also get a benefit payment either based on your own work history or ½ of your spouse’s. If your spouse died, then you can get your spouse’s benefit or your own, whichever is greater. To answer the question of how much do you get, you should create an account on https://www.ssa.gov/myaccount/ and generate and print a report.
When Are You Allowed to Start Your Benefit?
You may start taking your Social Security retirement benefit any time between age 62 and 70, which may be prior to or after FRA. Social Security calculates your payments at FRA and if you start your benefits prior to FRA, your payments will be permanently reduced. How much will the reduction be? You can use the calculator https://www.ssa.gov/OACT/quickcalc/early_late.html on the Social Security website, but if you were born in 1960 and started taking Social Security in 2022, when you turned 62, your benefit would be 70.42% of your FRA amount. As an example, let’s say your FRA amount is $2400/month or $28,800 per year. If you choose to take Social Security at age 62 in this example, your benefit will be permanently reduced to $20,281/year.
Delaying Social Security Benefits
When you delay Social Security beyond your FRA, you get delayed retirement credits which increases your benefit permanently. Taking the same example person born in 1960. If this person were to delay to age 70, then their payments would 24% higher than their amount at FRA. If this were you and you decided to delay to age 70 instead of FRA, your benefit would be $35,712. So, the same person could get a yearly benefit of $20,281 per year up to $35,712 per year all depending upon when that person decides to start their benefit.
When to Start Your Benefit
Since each individual can start their retirement benefit anywhere from age 62 to age 70, it can be tough to make this decision and there are a number of factors to consider. The first factor to consider is: Do you absolutely need this income now? If you are worried about how to pay your rent or going to a food bank, then there is no question that you should take your benefit when its available to you, even if you get a lifetime reduction penalty for taking it early.
But if you do not absolutely need that income now and you might have other forms of income available to you, how do you decide? To make this decision, you need to understand what Social Security really is and how it helps you and your family.
Longevity Insurance
Many people think Social Security is like a pension, where they pay into it all their working years, and finally when they retire, they get to enjoy their benefit payments. But Social Security is really more like an insurance policy than an investment. What are you being insured against? Running out of money in your old age.
Social Security is the one income source most Americans have that not only will continue to pay them until they die, it is even pegged to inflation. That’s right, it is not fixed, but goes up each year, based on the inflation rate. This is a very important concept because it ties into the decision of when to start taking it. Let’s take that 62-year-old that we had in the previous example. Let’s say he lives to age 85. Let’s also say that inflation is 3% every year. If he takes his Social Security retirement benefit at age 62, his benefit starts at $20,281 per year. But at age 85, his inflation-adjusted benefit will now be $40,026 per year.
Let’s say he waited to age 70 to start. In this example which includes inflation, his benefit at age 70 will be $45,239. This his higher starting benefit for waiting plus the inflation increase each year. At age 85, his benefit will be an inflation-adjusted $70,480/year. This is compared to $40,026/year if he started at age 62, a sizeable increase. Delaying to age 70 improved his longevity insurance tremendously.
You should think about Social Security as longevity insurance. It can act as insurance that you don’t completely outlive your income and its your one source of income that is adjusted for inflation. If you have a pension or annuity, those income sources are great, but they are not adjusted for inflation. It makes sense to maximize Social Security.
There are Social Security calculators out there which purport to do calculations which maximize your benefit. Most of them show that if you delay taking benefits until age 70, you will break even if you live to age 81 or 82. In other words, if you live longer than 82, you will get maximum value by delaying. Many 62-year-olds can’t imagine even living to age 82 because their parents died earlier. The problem with these calculators is that they ignore the longevity risk of living longer and with improved medical care, its likely you will live longer than your parents. Delaying Social Security to age 70 is insurance. The risk is not dying early, its living longer!
Some Rules of Thumb to Answer the Question of When to Start
The answer of when to start is different for different people, but here are some rules of thumb:
- If you have little savings and can’t work, you might really need the money at age 62. In that case, file for benefits. It’s better than starving.
- If you are continuing to work, try to avoid filing for benefits. Your benefit is reduced if you earn more than a certain amount of income prior to FRA. If you can continue to work, you may be able to delay filing for benefits which improves your longevity insurance.
- If you have enough other savings, investments, and pensions where Social Security is not a major part of your retirement income, then perversely, it does not matter if you take it prior to age 70. Start your benefit when you feel like it.
- If your health is impaired to an extent that your life expectancy is impacted, then think about taking Social Security at FRA or perhaps earlier. You don’t need longevity insurance if your life won’t be that long. But do not let this decision impact your spouse if your spouse has normal life expectancy. Take yours early but delay your spouse’s. Your spouse might need extra protection.
- If you are divorced and ½ of your ex-spouse’s benefit at FRA is more than yours, start your benefit at your FRA. Your benefit will not increase between FRA and age 70.
- For everyone else, I recommend delaying your benefit start date to when you turn 70. This is true even if you stop working earlier. Use income from other sources to enable you to delay starting your Social Security.
Get Help
The right financial advisor can help you with this extremely important decision. Unfortunately, not all financial advisors take an individual and analytical approach to the question of when to start taking Social Security. At Cereus Financial Advisors, a CFP® will give you individual advice on this question and many others to help you make an informed and intelligent decision. Social Security is complex, and you need an expert to help you. Contact us for a complimentary consultation. www.cereusfinancial.com
