Cash in on Social Security sooner or later?

Posted By: Robert Martino, CFP®, CRPC®

Over the course of your working lifetime, with every paycheck you should’ve dutifully paid taxes toward Social Security. When the time comes to retire, will you file for your benefits as soon as possible — age 62 under current guidelines — or will you wait until you are 65 to receive full benefits? You also have the option to wait longer than your full retirement age to receive an even bigger check. The question is when does it make sense to start taking benefits?

For years, the typical retirement age was 65, and there was no debate about the merits of waiting to take your Social Security. In anticipation of the millions of baby boomers entering retirement, the government has pushed the age of full retirement out. Americans born in 1959 or later don’t qualify for full benefits until age 66 — and the full retirement age might continue to creep upward as a means to stave off the impending shortage in the federal government’s coffers.

In general, the longer you wait to file for benefits, the bigger your monthly Social Security check will be. Conversely, if you take money out sooner, you’ll get less. How much less? Well, if your full retirement age is 66 and you decide to take benefits beginning at age 62 (“early” retirement), your benefits will be reduced by 25 percent.

Still, if you choose to wait until full retirement age or beyond to receive benefits, you need to consider how long it will take you to catch up to the amount you would have received, cumulatively, had you started taking benefits at a younger age. This is called the “breakeven point.”  If you delay your benefits (up to age 70), you may not reach your breakeven point until your 79^th birthday. That may be fine if you live to be 90 but is not so swell if you don’t reach age 75. Assuming you are in good health and have a healthy family history, you could save money in your retirement years by waiting until age 70 to cash in on your Social Security benefits.

There are other factors beyond the breakeven point that will influence what age is optimal for you to begin receiving your Social Security payout. If you need the money now because you don’t have sufficient investments, savings or other sources of income to live on, you may have no real choice. Or if you are in poor health, it also may not make sense to wait to receive your benefits.

You could increase your future monthly Social Security payment by continuing to work beyond age 62 without claiming benefits. That’s because the amount of your check is based on the average of your highest earning years. If you can bump up your income, the overall calculation of your average income will result in a plumper check. On the other hand, if you continue to work between age 62 and your full retirement age and file for Social Security, the benefits you receive may be taxed and thus reduced.

Your marital status factors into the decision of what age you choose to receive your benefits. For married couples, there’s a potential advantage for the lower-earning spouse if the higher wage earner postpones benefits. That’s because the lower wage earner may be eligible to receive up to 40 percent of the spouse’s benefit in retirement and the full benefit if he or she is widowed. Age difference can also affect the best time for each spouse to initiate benefits.

To be sure, you’ll want to look at your projected benefits (and your spouse’s) and speak with your financial advisor before making a decision to request your benefits. Review your Social Security statement (you can request one at ssa.gov) to determine the benefits you would receive if you were to begin collecting at age 62, at your full retirement age or decide to postpone your benefits until a later age. Talk to your financial advisor and your accountant to get their professional opinions on the value of waiting versus claiming benefits sooner. What makes sense for one retiree may not be the best choice for another.