Not too long ago, people took their Social Security benefits as soon as they retired. They didn’t think about how waiting to take Social Security could increase their benefit, they just applied for benefits as soon as they could.
Thankfully, today people are more savvy about Social Security. They are asking how they can maximize their benefits rather than just asking when they can take Social Security. And that’s great, because with the demise of pension plans and as volatile as the stock market is today, you need to maximize the income you will receive during retirement as much as possible.
Here are some factors to consider before deciding when to take Social Security:
How long do you plan on working?
This is an important question because you are limited in how much you can earn if you collect benefits before you reach your full retirement age (FRA).
Your FRA is based on your year of birth. You can find your FRA here: http://www.socialsecurity.gov/retire2/agereduction.htm
If you are under your FRA and you plan on continuing to work, your Social Security benefits will be reduced if you earn over a certain amount. In 2014, you can earn up to $15,480 before any of your Social Security benefits will be reduced. If you earn over that amount, you will have to pay back $1 for every $2 above the limit. Once you reach your FRA, this limit no longer applies and you can earn as much as you want without penalty.
Another point to keep in mind if you plan on working while you are receiving Social Security benefits is that your benefits could be taxable. Generally, Social Security is not taxable if that is your only income; however, if you have other income, whether from wages, investment income, a pension, etc., you could pay taxes on up to 85% of your Social Security benefits. Depending on what tax bracket you are in, this alone may be a good reason to delay benefits until you have stopped working.
How is your health?
If you are in poor health and you are single, then you may want to apply for Social Security retirement benefits sooner rather later. After all, you earned those benefits and want to collect them while you can.
But what if you are healthy and can expect to live a long life? If you have enjoyed good health and your parents or other family members have lived long lives, then it can pay to delay your Social Security benefits to increase the amount you will collect in your later years.
Are you married or do you have dependent children?
Social Security isn’t just about you. If you have a family, it could affect your spouse and children too.
If you are married, your Social Security benefit becomes the basis for survivor benefits. The higher your benefit is, the higher the benefit your spouse and other survivors (dependent children) will receive. The survivor benefit is calculated as 100% of the amount you are collecting when you pass away (if you aren’t collecting benefits yet, it is 100% of your PIA). If you take your benefits early, you are not only reducing your own benefit, you are reducing the benefit that your survivors will receive.
Are you worried about outliving your nest egg?
One of the biggest fears that people have (even more so than dying) is the fear that they will outlive their money. By maximizing the income you will receive from Social Security, you can reduce the risk that you will outlive your money.
Here’s an example:
John is age 61 and he is deciding when to take social security. Here are the numbers from his Social Security statement showing what he will get at which age:
- Age 62: $1,350
- Age 66: $1,800
- Age 70: $2,376
Also important is how much John will be spending during retirement. Let’s assume for this example that John is very frugal and he only needs $2,000 per month to live on.
If John retires at 62, his Social Security benefit will cover only 67% of his living expenses. If he retires at 66, his benefits will cover 90% of his living expenses, and if he waits until age 70 his retirement benefit will cover all of his living expenses with a little left over.
As you can see, if John retires early, he’s going to have to dip into his retirement nest egg quite a bit to cover living expenses. The longer John waits to retire, the less money he will have to take out of his retirement funds to help cover living expenses.
This is a simplistic example in that it doesn’t take inflation into account. With living expenses rising faster than increases in Social Security, the difference in benefits (and how far they will go to cover your monthly expenses) is much greater.