62, 70, or Somewhere In Between? When Should I Claim Social Security?

“Age is an issue of mind over matter. If you don’t mind, it doesn’t matter.” - Mark Twain

Many questions are usually surfaced during the retirement planning process. The ones that I see the most often have to do with the ever-increasing complexity surrounding retirement income generation. Saving for retirement is a pretty straightforward endeavor - save as much money as you can in a well-diversified equity portfolio. When it comes to turning those investments into a lifetime income stream that outlives you, things get a lot more complicated. There are many more moving pieces involved here. On top of that, there are also three villains lying in wait hoping to ruin your plans for a blissful retirement. They are:

1. Inflation
2. Taxes
3. Longevity

One retirement income source does a pretty good job of protecting you from these villains. But it is not guaranteed. And this is definitely an area where rules of thumb and a one-size-fits-all mentality will do you more harm than good. I am talking about Social Security and deciding when and how to claim your benefits.

Deciding when to begin claiming your Social Security benefits will depend on several factors, such as your personal health and your financial health. It is true that waiting to claim your benefits will increase your monthly payments down the road. But you may need to access these benefits sooner. As I said before, there is no one-size-fits-all solution here. Everyone's situation is unique. To help you better navigate this issue, I will review some of the important variables that could impact your decision concerning when to begin claiming your Social Security benefits.

Americans Lose Trillions of Dollars by Taking Social Security at the Wrong Time

 If there was ever a picture that showed the true cost of not having a financial advisor, I would have to say that it is the one below. Amazingly, the age at which most people claim their Social Security benefit (green line) is opposite to the age at which they should claim their Social Security benefit (purple line). According to The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions, "retirees will collectively lose $3.4 trillion in potential income that they could spend during retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household." That's a lot of money to leave on the table!

This comprehensive study found that only 4% of retirees make the optimal Social Security claiming decision - a decision that has a lifetime impact for not just the claimant, but for the claimant's spouse as well. The optimal claiming age is between the ages of 62 and 64 for only about 8% of adults. Shockingly, the study found that approximately 79% of eligible adults claimed their benefits between these ages. Conversely, 70 is the optimal claiming age for 71% of primary wage earners, while only 4% of the adults in the study claimed at that age.

Should You Delay Social Security Benefits?

Everyone's situation is different and your claiming age is unique to you. A careful analysis of the timing of your and your spouse's (if you have one) benefit claiming strategy is highly recommended, if not required. While Social Security benefits become accessible at age 62, your full retirement benefit will only be available once you reach your full retirement age. Your full retirement age is determined by your date of birth.¹ Any benefits received before reaching your full retirement age are reduced by a percentage, also determined by your birth date, ranging between 25 and 30 percent.¹

According to the Social Security Administration (SSA), this percentage reduction is often permanent, meaning if you were to claim your benefits at 62, the reduction percentage of your Social Security benefit would remain even after reaching full retirement age.² If you were to wait longer than your full retirement age to claim your Social Security benefit, you would receive a retirement credit - a bonus percentage determined by how long you delayed claiming your benefit, up to the maximum age of 70.²

Social Security and Taxes

It may come as a surprise to you, but it is possible for your Social Security benefits to be taxed. This will happen if the total of half your Social Security benefit plus tax-exempt interest plus any additional income is greater than the IRS’s base amount for your tax filing status.³

The current base amounts are:³ 

• Single or Head of Household: $25,000
• Married Filing Separately: $25,000
• Married Filing Jointly: $32,000

If you are wondering why these amounts are so paltry. It's because they were set back in 1983 and are not indexed for inflation. It is also important to note that for couples filing jointly, all taxable income earned by both spouses must be counted - even if one spouse does not yet receive Social Security benefits. And you thought that you would escape the taxman's clutches in retirement!

Consider Longevity

Claiming your Social Security benefits early may be beneficial if you are in poor health or have a lower life expectancy. This option will provide you with a steady source of income earlier if you are no longer working and lack other income sources in retirement.

Alternatively, if you or your spouse have a family history of longevity and face few health problems, you may find it beneficial to hold off on claiming your Social Security benefit until full retirement age.

It is important to remember that planning your Social Security claiming strategy should never be done in a vacuum. Spousal planning is critical and you need to take into consideration the surviving spouse when thinking about longevity. When the first spouse dies, the surviving spouse "steps into" the higher benefit and the lower benefit goes away. If the surviving spouse's benefit is already the higher benefit, they will continue to receive that benefit until they die. If Social Security was claimed before the age of 70, the surviving spouse's benefit will not be as great as it could have been. The potential longevity of the surviving spouse is an oft-overlooked factor that can contribute to financial instability in the survivor's post-working years. It is important to remember, that a married couple's individual Social Security benefits will become one at some point down the road. Many people overlook this fact.

Working and Social Security Benefits

You can continue to work past your full retirement age. In fact, working longer can actually increase the total amount that you are eligible to receive in Social Security benefits.² Your monthly benefit will be reduced if you work and collect benefits before your full retirement age and you earn over the annual limit. The SSA will deduct $1 from your benefit payment for every $2 you earn above the annual limit. Only the wages you make from your job or your net earnings if you're self-employed are included. Bonuses, commissions, and vacation pay are also included. Pensions, annuities, investment income, interest, veterans, or other government or military retirement benefits are not included.

As long as you continue to work, even if you are receiving benefits, you will continue to pay Social Security taxes on your earnings. However, SSA will check your earnings record every year to see whether the additional earnings you had will increase your monthly benefit. If there is an increase, you will receive this new benefit amount.⁴

Considering the factors above, there is much that needs to be considered when planning for Social Security. This is an area where an expert can be beneficial to your financial security. For the best guidance, work with your financial advisor to examine your options and determine the best course of action.

Help!

If you are finding that the myriad of Social Security claiming strategies are just too confusing or if you want to discover the strategy that maximizes your benefit, I would love to help you. If you’d like to learn more, or if you want help in reviewing your current situation please feel free to contact me. I have a deep understanding of Social Security and how it fits into a tax-efficient retirement income plan. I’d love to help you create the financial security you deserve so that you can enjoy a blissful retirement. Remember, the decisions that you make today will have a major impact on your long-term retirement plans.

I have also put together The "Social Security Elephant" in the Room. This guide can help to de-mystify the Social Security claiming decision process. The guide is FREE and you can download it here.