When Should You Claim Social Security Benefits?
Of all the questions our clients face, this is certainly one of the most perplexing. Timing when to claim social security benefits has a significant and permanent impact on your retirement cash flow. In weighing your decision, consider your health outlook and longevity expectations, whether you plan to continue working, and your current and future cash flow needs. Below, we cover some basic considerations. To discuss more in-depth planning suggestions, please reach out to us anytime!
You can begin drawing social security benefits based on your lifetime earnings at age 62. But claiming before you reach your designated full retirement age (FRA)—the age when you’re entitled to receive 100% of your benefits—will reduce your monthly payment by up to 30%. Since it has been gradually rising, depending on your date of birth, FRA might be 65, 66, or 67. For each year past that you delay taking benefits, up until age 70, your total monthly benefit increases by 8%. (You will not receive any additional credits for delaying benefits beyond age 70.)
Maximizing your monthly payment by delaying claiming until age 70 is likely to be in your best interest. Based on actuarial estimates, Americans who reach age 65 can expect to live, on average, an additional 20 years. For high-net-worth individuals, life expectancy can be even longer, and the risk of outliving funds greater. That said, if your health outlook is uncertain, or you have reason to believe taking benefits earlier will maximize your total payout, you might prefer to begin taking them at your FRA, or even sooner, rather than waiting until age 70. That’s because the breakeven point—the age at which you would make up the income missed from taking smaller, early payments—for most people is somewhere between their late 70s to early 80s. But this is highly dependent on how long you delay claiming benefits and your assumptions regarding returns, taxes, and inflation.
To help you decide your optimal filing date, we consider the following:
- Earnings in retirement—If you work while drawing social security benefits, that could impact the calculation of your benefit amount, and possibly result in a higher ultimate payout. But if you haven’t reached FRA, your monthly payment will be reduced if you earn more than a set amount a year (for 2016, this was $15,720).
- Spousal benefits—Legislation passed last year closed loopholes that allowed one member of a married couple to begin receiving benefits based on a spouse’s earnings while that spouse suspended his or her own benefits and continued accruing increased credits. But rules still exist for spouses, and even ex-spouses, to receive payouts based on their partner’s benefits.
- Tax planning strategies—If your combined earnings from all sources exceed certain thresholds (this varies by tax filing status), some of your social security benefits could be subject to taxes. For example, once you reach age 70½, you must take required minimum distributions (RMDs) from your tax-deferred retirement accounts. Combined with social security payments, taxable RMD withdrawals could push you into a higher tax bracket. We can discuss planning techniques to help you manage your income in a way that minimizes the tax impact. Before deciding which specific steps to take though, we suggest speaking with a tax professional to discuss your individual situation.
We also recommend contacting the Social Security Administration, ideally through an in-person appointment, to go through your options given your earnings history, desire and/or ability to continue working, and marital status, among other things.
As with many things in life, the future of social security is uncertain. The government has so far relied on tinkering at the margins—gradually raising the retirement age and the ceiling on income subject to social security taxes to maintain the system’s solvency, but more extensive changes can’t be ruled out. So ultimately, to the extent claiming benefits before age 70 increases your peace of mind and makes financial sense, it may make sense to choose that route!