When to Take Social Security: A Game of Informed Guessing

As we have written in prior posts, there are a number of factors to consider in determining when and how to start claiming your Social Security retirement benefits.  Congress simplified the options somewhat last year with legislation that curbed the ability of spouses to profit by switching between their own and their spouse’s benefits.  (See “How the New Budget Bill Changes Social Security Benefits and What To Do about It” for more details.)  However, retirees still must decide when to start collecting (as early as age 62, at full retirement age, or as late as age 70) and whether to collect benefits based on their own earnings record or that of a current or former spouse.  The main difficulty coloring these decisions is the inability to predict how long you will live–and thereby continue collecting Social Security checks.  So, if you have the means to choose whether or not to delay benefits, maximizing Social Security boils down primarily to an educated guess about your own life expectancy, but there are other factors to consider as well.

When to Start Collecting Your Retirement Benefit.  For many Americans, a lack of income and/or retirement savings drives the decision to start collecting Social Security as early as possible.  Those with the ability to wait should consider their prospects for longevity, their income, and their tax status in determining when to start benefits. 

Longevity.  If you start collecting early or at full retirement age, you will obviously collect a greater number of Social Security checks through your lifetime than if you delay until age 70.  However, collecting prior to full retirement age will reduce your benefit amount by up to 30 percent, whereas delaying benefits will increase your benefit amount by up to 32 percent.  The breakeven age between collecting at full retirement age versus at age 70 is generally somewhere between age 80 and 84, depending on your current age, full retirement age, etc.  Therefore, based simply on averages, retirees should wait until age 70, especially women, who tend to live longer.  According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3, and a woman, until age 86.6, in which case delaying to age 70 produces a higher cumulative benefit.  Of course, your personal health or family health history may spur you to make a different decision. 

Income/Tax Status.  If you start taking your Social Security benefit prior to retirement age and are still working, your benefits may be reduced if your earnings exceed the annual limit ($15,720 in 2016).  In addition, your income in retirement will play a role in determining how much of your Social Security benefits are subject to income tax.  You may have to pay income tax on up to 85% of Social Security benefits.  However, for 2016, a single taxpayer with less than $34,000 in income or joint taxpayers with less than $44,000 in income will pay income tax on a smaller proportion of the benefit.  So, if your income will change significantly during retirement (e.g. because you are still working past full retirement age or you expect high required minimum distributions starting at age 70 ½), you should consider the after-tax value of your Social Security benefits in determining when to start collecting.

Whether to Collect a Spousal Benefit.  For those under age 62, you are no longer able to collect benefits based on your spouse’s (or ex-spouse’s) earnings record and then switch to your own benefit at a later date due to the legislation mentioned above.  Therefore, the decision of whether to collect your own benefit or a spousal benefit is relatively simple:  take whichever one has the higher benefit amount.  Your spousal benefit is equal to half of your spouse’s (or ex-spouse’s) benefit at full retirement age.  It does not increase based on you or your spouse delaying the benefit until age 70.  If you are unsure which one is higher, your local Social Security office will help you to determine that.  There are two exceptions to this rule.  First, if you turned age 62 by the end of 2015, you may be able to file a “restricted application” for a spousal benefit and then switch to your own at age 70 (allowing your benefit to grow 8% per year in the meantime).  Second, if your spouse or former spouse has died, you may be eligible to collect a survivor benefit starting at age 60, and then switch to your own benefit at a later date.

Some have suggested that the time value of money should also be considered when determining whether to delay benefits, pointing out that if you save and invest your Social Security benefits instead of spending them, you might profit from collecting your benefit earlier and receiving a return on those funds.  However, this argument seems weak on two counts.  First, it would be unusual to collect Social Security between ages 66 and 70 and not spend it.  Clients do not frequently continue to save and invest between retirement and RMD age, especially with pensions becoming more of an anomaly with each passing year.  Rather, they often need to start drawing from their retirement accounts during this period.  Second, the return offered by the Social Security Administration for delaying benefits (8% per year) is higher than any investment could guarantee risk-free.

Absent known health issues or other tax considerations, the numbers point toward waiting to collect your Social Security benefit at age 70.  But, the best part about choosing to delay Social Security benefits is that you can change your mind on any given day.  If you decide at age 66 to wait until age 70, but then you have a health event that may shorten your life or you just decide at age 68 that you’d really like those checks to start flowing, you can just go into the Social Security office (or go online) and ask to start collecting your benefit the following month.  Despite the recent changes in Congress, however, this is still a complicated decision, so give us a call so that we can help when the time comes to make it!