Retirement Savings

When It Makes Sense To Take Social Security Early

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Knowing what age to take your Social Security benefits can be difficult. The minimum age that you can start collecting Social Security is 62. If you need the income to support yourself by that age, then collecting the $1,500 monthly benefit as soon as possible is a no-brainer.

However, if you wait until age 66, then your benefit will be $500 more per month. The Federal Government considers this the “full retirement age.” If you can hold off until you’re 70, you’ll get an extra 8% per year in the benefit. That will raise your monthly payments as high as $2,640.

As you can see, it’s a complex decision. There are multiple factors involved when it comes to when is best to collect your Social Security. It’s worth noting that if you claim Social Security after 70, your benefits won’t increase at all. So there’s no reason to wait past age 70. Below, we will breakdown the factors you should consider when deciding the appropriate time to claim Social Security.

Your Employment Situation

It’s no secret that it becomes more difficult to find employment as you grow older. According to the U.S. Bureau of Labor Statistics, only 40% of people over the age of 55 are employed. More than half are out of the workforce by then.

If you’re in this situation, it probably makes sense to claim Social Security right away. It will go a long way to help you support yourself as you settle into retirement. Or make life less of a struggle, if you’ve already been out work for a few years.

However, if you are fortunate enough to be gainfully employed in your 60s, then deferring Social Security benefits might be wiser. The key is to ask yourself if you really need the reduced benefit at age 62. Will collecting it early have a dramatic boost on your quality of life? If not, then you should delay claiming Social Security. Rely on your steady income for now and collect a higher monthly benefit later on.

Your Personal Savings

Your personal savings and any retirement funds beyond Social Security should also factor into your decision. Many Americans have little-to-no personal retirement savings. This unfortunately includes some people who are still working into their 60s. The average 401(k) balance for Americans between the ages of 60 and 69 is $62,000, according to Fidelity Investments.

If you are still working at 62, you might choose to claim Social Security early. Then, you can invest those payments until you fully retire. This can be a financially savvy move, that pays off down the road. Especially if you invest the money in a tax deferred account such as a 401(k) or traditional Individual Retirement Account (IRA). It might earn a decent annual return of 8% or higher. If you can invest the money in a tax-free Roth IRA, even better.

The key is to be disciplined and actually invest the money. Don’t claim the Social Security benefit early and then use it to go on vacation or remodel your kitchen. Claiming the benefit early and investing it, while you continue working, can be a great way to build your personal retirement funds.

Your Life Expectancy

This is the million-dollar question. The one that no one likes to think about. The one that is impossible to answer. How long will you actually live?

More than any other factor, life expectancy is key in determining when you should collect Social Security. Of course, this important question is also the great unknown. None of us know exactly how long we’ll live. The best you can do is take a look at your overall health as you approach retirement age. Consider factors like your blood pressure, cholesterol, weight, and other health markers. You can also consider family history as it relates to things like cancer and heart disease.

Generally speaking, if you are in poor health at age 62, then it would be advantageous to start collecting Social Security early. To further help with this process, you could also perform a “break-even analysis.” It will tell you when the total benefits you’d receive by waiting will begin to exceed the total you’d receive by taking benefits earlier. For example, let’s say you get $1,500 a month starting at age 62 instead of $2,000 a month starting at age 66. By the time you reach age 77, you will have received roughly the same amount. In case you’re curious, the life expectancy in the U.S. is 76 (male) and 81 (female), according to the World Health Organization.

Taxes

Like it or not, taxes are a factor in most financial decisions we make. Social Security benefits are no different. As is often the case, taxes applied to Social Security can be complicated. How much tax you pay on your Social Security will depend on your total income for the year, from all sources.

Regardless of how much you earn, the first 15% of Social Security are not taxed. However, if you file your federal tax return as an individual and your combined income is between $25,000 and $34,000, we have bad news. You might have to pay tax on up to 50% of your Social Security benefit. If your combined income is more than $34,000, you will pay tax on up to 85% of your benefit, which is the maximum.

These figures can change though, if you file a joint tax return with your spouse. If you’re still working, it might not be worthwhile to claim Social Security early at age 62. At least not from a tax standpoint. You should probably wait until you finish working. When your typical income declines (or disappears entirely), you will pay less tax on Social Security payments. Our best advice is to consult a tax expert. They will help you determine how Social Security benefits will be taxed for you. You can also read all about the taxation of Social Security benefits on the IRS website.

Health Care Coverage

Health insurance can also influence when you decide to claim Social Security. Do you have a Health Savings Account (HSA) that you would like to keep contributing to? If so, you should that know that receiving Social Security requires you to sign up for Medicare if you are over 65. However, once you sign up for Medicare, you’ll no longer be allowed to add funds to your HSA.

The Social Security Administration also cautions that even if you delay receiving Social Security benefits until after age 66 or older, you still might need to apply for Medicare benefits within three months of turning age 65 to avoid paying higher premiums for life.

However, if you’re still receiving health insurance from your or your spouse’s employer, you might not have to enroll in Medicare at all. If that’s your situation, taking Social Security early will not impact your health care coverage. It’s very important to assess your personal situation when it comes to healthcare coverage. Choosing when to take Social Security could have an impact on the quality of coverage you receive or how much it costs. Or both.

Spousal Benefit

The last thing that can impact your Social Security benefit is your marital situation. Being married can complicate your decision, because of the program’s “spousal benefits.” Spouses who didn’t work at a paid job or who didn’t earn enough credits to qualify for Social Security on their own are eligible to receive benefits starting at age 62 based on their spouse’s employment record. As with claiming benefits on your own, a spousal benefit will be reduced if you take it before reaching the full retirement age of 66.

The highest spousal benefit you can receive is half the benefit your spouse is entitled to at their full retirement age. Furthermore, when one spouse dies, the surviving spouse is entitled to receive whichever amount is higher. If the higher-earning spouse dies first, the surviving, lower-earning spouse will receive a larger Social Security check. As with many aspects of Social Security, the spousal benefit can be tricky. It would be prudent to discuss this benefit with a financial expert. They will help you determine the best course of action for your situation.

The Last Word

Deciding when to claim Social Security requires a careful assessment of many aspects of your life. Your financial situation, overall health, insurance, and personal life all factor in. If you’re unemployed, in poor health, or have no other means of support, then it would be advisable to take Social Security immediately at age 62. However, if you can afford to defer collecting the benefit, you probably should. It makes financial sense, since the amount of money you’ll receive will be larger as you get older. Of course, everyone’s situation is slightly different. Only you can determine the best course of action for your retirement.

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