Social Security benefits can provide a sizeable chunk of income and can possibly be the primary source of income for older Americans. However, many retirees may not fully understand the rules around receiving benefits and the relationship between monthly benefit amounts and associated retirement ages.
In this article, I will review the basics and factors that go into determining the optimal age to start drawing Social Security benefits. Tax professionals can boost their role as a trusted advisor by sharing this information with their clients.
Social Security Basics
You’re eligible to start receiving Social Security retirement benefits as early as 62 years old, but the benefits will be reduced by as much as 30 percent below what you would get if you wait until your full retirement age. If you wait until age 70 to start receiving benefits, your benefits will increase because you earn delayed retirement credits.
Full retirement age is the age when you become eligible to receive full Social Security benefits. Generally, it is 66 years old unless you were born after 1960; then, the age is 67. If you choose to start receiving benefits before full retirement age, your benefits will be permanently reduced based on the number of months you choose to receive benefits before full retirement age.
Your maximum monthly benefit by retiring in 2018 would be:
- $2,158 if you retire at age 62.
- $2,788 if you retire at full retirement age.
- $3,698 if you retire at age 70.
The Social Security Administration (SSA) calculates Social Security benefits based on:
- Your average indexed monthly earnings.
- The Social Security benefits formula.
- Any applicable cost-of-living adjustments.
- When you decide to start receiving your benefits.
You can get your personal Social Security Statement online by setting up a Social Security account on ssa.gov. The online statement shows estimates for retirement, disability and survivor benefits. The government will mail paper statements to workers beginning at age 60 if they don’t have an online account. You can also request a statement to be mailed to you.
Impact of Earnings on Retirement Benefits
You’re allowed to receive Social Security benefits and work at the same time. However, if you earn more than the yearly earnings limit and you’re less than the full retirement age, your benefits will be reduced. If you are under the full retirement age for the entire year, for every $2 earned above the annual limit, your benefit payments will be reduced by $1. For 2018, the earnings limit was $17,040. Thus, if you’re still working, it might make sense to postpone receiving Social Security benefits until you reach full retirement age or until your earned income is less than the annual limit.
In determining how much to reduce your benefits by, the SSA counts wages earned from your job, net earnings from self-employment, bonuses, commissions and vacation pay. The SSA does not count unemployment benefits, pensions, annuities, investments and veterans/government/military retirement benefits, so these payments won’t lower your Social Security retirement benefits. The SSA reviews your records each year to see if additional earnings may impact your monthly benefits.
In general, you’re not allowed to withdraw a Social Security retirement claim and reapply later in order to increase your benefits. However, since unexpected changes can occur after you apply to start receiving benefits, you may be able to withdraw your Social Security claim. You can do so only if it’s been less than 12 months since you were first entitled to receive benefits. You can also file and suspend your benefits in order to receive delayed retirement credits.
Any covered employee or self-employed individual must continue to pay Social Security taxes, regardless of age or eligibility of benefits.
When Should I Start Receiving Social Security Retirement Benefits?
This is an important decision because it determines what your monthly benefits will be for the rest of your life. As shown above, the longer you wait, the higher your benefits will be.
Cash needs. If you’re thinking about retiring early and have other means of support, such as investment income and retirement income, you can be more flexible about when to start drawing your Social Security benefits, but you’ll have fewer options if you’re relying on Social Security as a means of income. If you want to maximize your benefits, you may consider postponing retirement or working part-time.
Life expectancy and health. Two big variables in this equation are how long you expect to live and the state of health you’re in. If you don’t expect to live long or are in poor health, but defer drawing Social Security benefits in order to increase your monthly income, you may not fully realize your benefits. But, if you expect to outlast the average life expectancy, then waiting for higher benefits would work out in your favor.
Break-even age. You may consider calculating your break-even point, which is the point at which your higher benefits add up to the amount missed by claiming late. Once you reach the break-even point, your higher monthly benefits would be the money you would miss out on by claiming early. If you think you’ll live past the break-even point, you may consider waiting to claim the higher benefits if financially feasible.
In a simple example, let’s say you’ll receive $30,000 a year at 62 years old and $40,000 at 66 years old if you decide to wait. You’ll get an extra $120,000 in that four-year span. Consequently, it will take 12 years to break even [$120,000 / $10,000 (benefit differential)].
Married couples. Married couples have more to consider. If you earn more than your spouse, delaying the start of your Social Security benefits will mean higher benefits for the rest of your life and higher survivor protection for your spouse if you die first. If your widow or widower is at full retirement age, they can receive 100 percent of your benefits after your death.
Other factors to consider:
- Personal and family circumstances.
- Whether you work or plan to work.
- Current and future financial resources and obligations.
As you start to approach retirement, you should be familiar with the rules surrounding the receipt of Social Security benefits as well as the factors that go into determining the best age to start drawing benefits. Tax professionals may consider advising their clients with these important decisions.