Take social security or delay it – Factors that can help a consumer to decide

Your financial circumstances primarily influence the time of receiving Social Security benefits. As early as age 62, you can begin receiving payments. At your full retirement age, you become eligible for all benefits. Your benefit will increase at your full retirement age if you wait until 70 years old before claiming benefits.

If you claim benefits early, your benefits will be reduced by a small percentage each month before you reach full retirement age.

What is the full age for retirement?

When you reach full retirement age, commonly referred to as “normal retirement age,” you become eligible for the entire range of Social Security payments. Depending on your birth year, your full retirement age is 67 for those born in 1960 or after. Full retirement age falls between 66 and 2 months and 66 and 10 months for individuals born in 1955 through the end of 1959 (officially, January 1, 19601). If born before 1955, you have already attained full retirement age, 66 years old.

The table below, provided by ssa.gov, shows different retirement ages and how much benefit a consumer can get till full retirement age:

Source: SSA.gov 

What will happen if you receive benefits early?

You will continue to receive benefits for a more extended time if you decide to take your personal Social Security benefit (not your spouse’s) before reaching full retirement age. However, you should be informed that the benefit is permanently lowered by five-ninths of 1% each month. The worker benefit is further diminished by five-twelfths of 1% per month for the remainder of retirement if you begin more than 36 months before your full retirement age.

If you start receiving benefits at age 62, even if your full retirement age is 67, the decrease is calculated based on 60 months. Therefore, the reduction is 20% (five-ninths of 1% times 36) for the first 36 months, then 10% for the final 24 months. Your total benefits would be 30%.

What will happen if you delay taking your benefits?

You usually receive a “delayed retirement credit” (DRC) for your benefits if you retire between your full retirement age and age 70. (but not spousal benefits). 

Your full retirement age is 67, and you were born in 1960. A credit of 8% per year multiplied by two would be given to you if you began receiving benefits at age 69. Your benefit would be 16% greater than you would have gotten at age 67. (This excludes any potential future cost-of-living increases.

The basis for further raises based on inflation would be that higher baseline, which would endure for the duration of your retirement. In contrast, it’s crucial to consider your unique situation—not always possible to postpone, especially if you’re in bad health or can’t afford to—the advantages of waiting can be substantial.

Be aware that you might still need to enroll in Medicare if you elect to wait until after age 65. If you don’t enroll by turning 65, your Medicare coverage could sometimes be delayed and cost extra. If you start receiving Social Security payments before age 65, Medicare Parts A and B will automatically be enrolled in your name.

Suppose you continue to work and earn roughly the same amount through those years. In that case, your expected benefits between the ages of 62 and 70 will be listed on your yearly Social Security statement. If you require one, you can request a copy of your annual report or check it via the Social Security Administration (SSA) portal.

The general idea is that delaying Social Security can be beneficial financially during a lengthy retirement, even though everyone has no “perfect” claiming age. Every person’s situation is unique, and it must be considered. It’s crucial to keep in mind:

• You will be qualified for delayed retirement credits, which would raise your monthly payment if you postpone receiving benefits until reaching full retirement age.
• When deciding when to start receiving your retirement benefits, there are other factors that you must consider.

How should you decide when to receive benefits?

When deciding whether to take Social Security, consider the following aspects.

Your current job status

If you start receiving Social Security benefits early, earning a wage (or even self-employment income) may temporarily diminish your payment.

If you’re still employed and haven’t reached full retirement age, benefits will be reduced by $1 for every $2 you make over the yearly cap ($19,560 in 2022) while still receiving them.

The reduction in benefits drops to $1 for every $3 you make over a higher threshold in that particular year when you reach full retirement age ($51,960 in 2022). Your benefits are no longer lowered regardless of your income as of the month you reach full retirement age.

Your projected life expectancy

Early Social Security enrollment lowers your benefits and extends the time you get monthly payments. While delaying leads to higher checks overall, accepting Social Security later results in fewer payments over your lifetime.

Waiting for a larger monthly check can be a good deal if you believe your lifespan will exceed the average. On the other side, you can decide to take advantage of your current situation if you’re in poor health or have reason to think you won’t live past the average lifespan.

The average life expectancy for a 65-year-old individual is approximately 84 years for men and 87 years for women, according to the SSA. Married people typically live even longer, with a higher chance that at least one partner will reach the age of 90. Use the SSA’s life expectancy calculator to determine your expected lifespan.

Your marital status

If you’re married, consider your spouse’s age, health, and benefits, especially if they make more money than you. For instance, you can take 100% of your retirement benefits or 50% of your spouse’s at full retirement age, whichever is higher.

You might be eligible to collect benefits based on your ex-Social spouse’s Security history if you were divorced and married for at least ten years (up to 50% of their full retirement benefits). Be aware that if your ex-spouse utilizes your record, it won’t affect your benefits or those of your current spouse.

If you are widowed, you are entitled to the higher of your retirement benefits or up to 100% of those of your deceased spouse. It’s crucial to utilize the worker, spousal, and survivor benefits as efficiently as possible, ideally with the help of a financial planner.

Your cash requirement

You can be flexible about when to claim Social Security payments if you’re considering early retirement and have enough resources (an investment portfolio, a traditional pension, and other sources of income).

You may have fewer options if you depend on your Social Security income to meet ends. To optimize your benefits, you might want to think about delaying retirement or working part-time until you reach your full retirement age or even longer.

Consider beginning to get benefits sooner if:

• You no longer have a job and are unable to survive without your benefits. You might have to pay for household expenses, manage credit card bills, pay off payday loans, or make provisions for an emergency fund.
• Given your current state of health, you don’t think the household’s sole survivor will live to the average age.
• Because you earn less than your spouse, they can wait to apply for a more significant benefit as you are the lesser earner.

Consider delaying receipt of benefits if

• You continue to earn enough money from your job to affect how taxable your benefits are.
• You or your partner are in good health and anticipate living longer than usual.
• Since you make more money than your spouse who is still alive, you want to ensure they get the most benefit possible.

This is a great video explainer on When to take Social Security

Conclusion

Based on your “combined income,” Social Security benefits can be taxable. Your combined income is the sum of your adjusted gross income (AGI), half of your Social Security pension, and non-taxable interest payments (such as interest on tax-exempt municipal bonds).

More of your benefit is liable to income tax—up to a maximum of 85%—as your combined income rises beyond a particular threshold (from receiving a paycheck, for example). It will be wise to consult a CPA or tax expert for further assistance.

About The Author: Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.