At What Age Should You Begin Taking Your Social Security Benefits?

Patience is bitter, but its fruit sweet.  -Jean-Jacques Rousseau

The question that I see many pre-retirees and retirees wrestle with is - at what age should I begin taking my Social Security benefits? I can assure you that this is not a question to take lightly. But sadly, many people do and it can end up costing them dearly. There has been a general understanding among most people that the longer one waits to take their Social Security benefits, the more they are going to receive as a recipient. However, there is also the fact that the longer one waits to begin receiving benefits, the shorter the time period one might have (depending on the age at which you die) to actually collect these benefits, if at all. So there is a bit of a trade-off that everyone needs to consider when evaluating the options for their own unique situation.

A Bird in the Hand?

Many people believe that a retiree should begin taking their Social Security benefits as early as possible. Is this the best option? Many think that cash in hand is always better than a promise. This means of course that while you can begin taking your Social Security benefits at the age of 62, the monthly benefit that you will receive is much lower at this age than if you had waited to begin receiving it later on.

A 2015 study conducted by the Center for Retirement Research at Boston College showed that more than one third of workers turning 62 are claiming their Social Security Benefits at 62. This decision could turn out to be the wrong one, especially for retirees with long life expectancies and marginally funded retirement accounts.

On the other hand, if you wait until the age of 70 - which is when your Social Security benefits are maximized - you will see a big difference in the actual monthly benefit payment that you receive. This difference can be thousands of dollars. For example, for those born after 1960, the difference between taking benefits early at age 62 versus waiting until you reach your Full Retirement Age (FRA) of 67 is about 30 percent, or $300 out of every $1,000 possible.¹ Conversely, for each year that you delay your Social Security benefits past your FRA up to age 70, you will receive an 8% increase in your monthly benefit. This equates to a maximum increase of 32% over your Social Security benefit available at FRA, if you wait until age 70 to begin receiving your benefits.

Bridging the Gap

For those who want to retire earlier, it means both waiting for eligibility to receive benefits as well as making sure one has a plan of support until that age is reached. This means having enough in savings to cover the gap, and that cost can be substantial as well. If you have not worked for at least 40 quarters in "covered employment", you will not realize a full Social Security benefit payment schedule. The figure may actually be even lower if any of these working quarters were not full-time employment.

Beware the Tax Man

There's also the caveat of earning money in your retirement years. The traditional thinking has been that a person who worked for about 30 years and then retired, would be in a lower tax bracket when they began to receive their Social Security benefits. However, these days, working in retirement is becoming far more common. And that means the income plus benefits plus any retirement account withdrawals starts to bump people up into higher tax brackets. So in some cases, it starts to make sense to rely on earnings or savings first and hold off on receiving Social Security benefits to avoid unnecessary "tax bracket creep".

For example, if a married couple has income over $44,000, up to 85% of their Social Security benefits are taxable. If their income is between $32,000 and $44,000, up to half of their Social Security benefits are taxable. For single people the thresholds are $34,000 and $25,000 respectively. As you can see, when you should begin to take your Social Security benefits can be a difficult decision. It is certainly one with many moving parts.

Don't Forget About Medicare

It is important to remember that while you may be eligible for a reduced Social Security benefit at age 62, you won't be eligible for Medicare until you are 65 years of age. Health insurance remains your responsibility, so you will probably have to pay for private health insurance until you become eligible for Medicare. Those premiums can eat up a large chunk of your Social Security benefit check. According to the 2016 Healthcare Cost Institute Spending Report, the average 55- to 64-year-old had total health care spending of $10,137 in 2016 (including $1,310 in out-of-pocket spending ). This is a major expense that must be factored into your decision to retire early.

Don't Leave Money on the Table

The difference between an optimal Social Security claiming strategy and a sub-optimal one can amount to hundreds of thousands of dollars over a married couple's lifetime. Unfortunately, many people are not even aware of what they might be missing. As you proceed through the retirement planning process you will find that there is no clear default path to rely on. Each retiree has to map out their unique personal situation and make the best choice that applies at that time. However, those who research, educate themselves, and time their decisions correctly can often gain more than their peers who otherwise have identical income, timing, and age. Do NOT treat this important decision lightly.