Introduction
When it comes to your financial future, there are lots of things you cannot control such as the stock market, the economy, or major world events. To increase your odds of financial success, it is more important to focus on the things you can control. Understanding Social Security benefits and making the decision about when to file for your benefits is one of them. I’d like to review how Social Security works so you can better understand the process and make your best decision.
Social Security 101
Your Social Security payments are calculated using the 35 years in which you earned the most. If you didn’t work for at least 35 years, zeros are averaged in and will reduce your retirement payments.
The best way to determine the amount of your Social Security benefit is to use the Social Security Benefit Calculator (See Resources link below). The Social Security Calculator provides estimates of your retirement benefit at different ages so you can assess which option works best for you. Social Security benefits do periodically increase over time with a cost of living adjustment, or COLA.
You can increase your Social Security base benefit by working at least 35 years, increasing earnings, retiring later, delaying benefits until age 70, or if married, by claiming spousal benefits and delaying yours.
When can I file?
You can start collecting Social Security benefits starting at age 62 until age 70. Your benefit amount will be adjusted based on your age when you file and this amount will continue for the rest of your life.
You will receive your full monthly Social Security benefit when you reach your Full Retirement Age. The Full Retirement Age was originally age 65, but it has been raised to 67 for anyone born in 1960 or later.
If you decide to file at age 62, your Social Security benefit amount is reduced by approximately 30% assuming your full retirement age is 67.
If you wait until age 70, you receive an extra 8% per year or 124% of your full retirement benefit assuming a Full Retirement Age of 67. Claiming after age 70 doesn’t adjust your benefits, so there is no advantage to waiting any longer.
Data from the Social Security Administration illustrate the breakeven points for someone with a full retirement age of 67 who claims at either 62, 67, or 70, and has a full retirement age (FRA) benefit of $1,000 per month. If you claim at 67, you’ll collect more in total lifetime benefits by the time you’re 78 than you would if you claim at age 62. Claiming at age 70 results in a larger lifetime payout by age 82 compared to claiming at age 67.
Will I need to pay income taxes on my benefits?
Social Security benefits are taxed above certain income levels. The calculation begins with your adjusted gross income from Social Security and all other sources. These sources include interest, dividends, required minimum distributions (RMDs) from qualified retirement accounts, and any other taxable income. Then, any tax-exempt interest is added to the final calculation.
If your filing status is Single and your gross income is between $25,000 and $34,000, 50% of your benefits may be taxed. If your gross income is greater than 34,000, 85% of your Social Security may be taxable.
For couples whose filing status is Married Filing Jointly and your combined gross income is between $32,000 and $44,000, 50% of your benefit may be taxed. If your gross income is greater than $44,000, up to 85% of your benefits may be taxed.
When should I file for benefits?
The strategy on how to maximize Social Security retirement depends on estimating how long we’ll live.
Other factors to consider when filing for Social Security:
- Your health status. How is your general health now and expected to be in the long-term?
- Your income needs. Will waiting until age 70 put a strain on your cash flow? Calculate your expenses for the next 10 years and determine how much you will need.
- Will you work part-time or full-time in retirement to keep yourself busy and engaged? Keep in mind the earnings threshold for taxing Social Security benefits mentioned above if you decide to work and file for benefits.
- Consider your other retirement sources of income. If you have an investment portfolio, a pension, a 401k or other sources of passive income, you may want to retire early. If not, you may want to do your best holding off on Social Security benefits until age 70.
Summary
Most of my clients ask “When should I file for Social Security benefits?” If you’re single, the best time to start Social Security benefits is age 70 to maximize your lifetime benefit. The correct answer for you is “it depends”. It depends on your income needs, life expectancy, health status, financial obligations, lifestyle and expenses in retirement. I wish I could give you an absolute answer but the Social Security question depends on your individual situation.
I hope I was able to explain how Social Security benefits are calculated, taxed and the options you can control when filing for benefits.
Resources:
Understanding Social Security Benefits: https://www.ssa.gov/pubs/EN-05-10024.pdf
Social Security Benefit Calculators: https://www.ssa.gov/oact/anypia/index.html
6 Ways to Increase Your Social Security Benefits: https://www.forbes.com/advisor/retirement/increase-social-security-benefits/
5 Social Security Tips for 2020 and Beyond: https://www.fool.com/retirement/2020/03/12/5-social-security-tips-for-2020-and-beyond.aspx
