Because You Asked: When Should I File for Social Security: (Part 2)

This particular question is one that we encounter frequently.  There are many who subscribe to the idea of “I am going to take it while I can, because I don’t know if it will still be there if I wait.” We attempted to address that issue in our blog last week, which you can review here:Because You Asked: Will Social Security Be Available For Me?

As is often the case when answering questions put to a financial planner, the answer begins with “It Depends”, because there are a number of factors to take into consideration.  I am going to list some of the factors that influence this decision, though I will not try to tackle all of them here:

  • Current age and Date of Birth
  • Marital status: Married, Divorced, Widowed or Single
  • Employment: working, retired, never worked or did not work enough quarters to qualify for Social Security on your own
  • Other Pension: do you now, or will you receive benefits from another provider, such as ERS/TRS of Texas, Railroad Benefits (which replace Social Security), FERS (federal employees) or other type of government pension. If so, you could be subject to the Government Pension Offset for Social Security.

While we recommend doing an individual consultation with each of our clients prior to making the decision to start Social Security, we can make some general recommendations here.

Taking your Social Security Benefit at age 62:

Typically, we will recommend that most individuals do NOT start taking their Social Security benefit at age 62.  Why?  For planning purposes, we look at Social Security as a Lifetime Annuity- and as we explained in our blog last week, Social Security will still be available, in one form or another.  For individuals who take their benefits early, you will lock in a permanent reduction in your benefits for the rest of your life: if you were born before 1954, your benefit will be reduced by 25%. The reduction percentage gradually increases, until  for those born after 1960, the benefit will be reduced by 30%. So yes, you might start your benefits earlier, but they are not going to help you as much at the latter end of your life.

Another reason NOT to take your benefit at age 62, especially if you are still working is that there is what is called an earnings test associated with taking your benefit before your Full Retirement Age.  The maximum you can earn for the year, if you take your social security benefits at age 62, is $17,640.  Why? Because for every $2 you earn over that amount ($17,640), Social Security will withhold or take back $1 in benefits.  Earn $47,640 for the year, and Social Security will keep $15,000 of your Social Security benefits, and you will still be stuck with the permanent reduction of your benefits going forward.  Obviously, this can be an extremely costly decision, with a permanent effect on your finances.  Whereas, AFTER your Full Retirement Age, you can keep working and earning as much as you like, without the earnings test reducing your benefits.

Wait Until Your Full Retirement Age:

First, what is it?  When Social Security was established in 1935, the retirement age was set at age 65. Amendments passed in 1983 put a plan in place to gradually increase the retirement age to 67.  For individuals born between 1943 and 1954, the Full Retirement Age is 66. Then each year thereafter adds a couple of months to reach the point that everyone born after 1960 reaches Full Retirement Age at age 67.

By waiting to file for Social Security when you are Full Retirement Age, you are now entitled to your full benefit.  If you want to know how much your benefit will be, you can go to SSA.gov, register by setting up an account and providing personal information, and then you will be able to see your Earnings Record and an estimate of your benefits.  You will not be able to determine the exact amount of your benefit until you actually apply, but you will at least be able to see the difference between the amount of your Full Retirement benefit vs. filing early.

Delaying Your Benefits:

A third option and one we often recommend for whomever is the higher earning spouse, is to delay your benefits until age 70.  Why?  Because every year that you delay your benefit above your full retirement age, up to the age of 70, Social Security will increase your benefit by 8% per year.  Individuals who have other investments and sources of income are encouraged to utilize those sources in the intervening years, because it is a guaranteed 8% increase.  Or perhaps I should say, it is currently a guaranteed 8% increase, as it may or may not survive legislative changes to come.  But for those who have the option now, it is highly recommended.

Special Circumstances and Considerations:

  • Spousal Benefits: When one earner has significantly higher earnings, or one spouse has fewer years of employment history, you are entitled to file for spousal benefits on your spouse’s social security benefit. It equates to ½ of their benefit if both parties are still living.  This would be another reason to at least wait until Full Retirement Age, because you would not only be reducing your own benefit, but also your spouse’s.
      • If you are divorced, you are also entitled to apply for spousal benefits on an ex-spouse, as long as you were married for at least 10 years and have not re-married.
  • Survivor/Widow’s Benefits: the surviving spouse is eligible for this benefit if they were married at the time of death for at least 9 months (10 years if divorced). The amount of this benefit is essentially the full amount of the deceased person’s benefit, as long as you are also Full Retirement Age.

As you can tell just from this discussion/summary, there are many factors to take into consideration when determining the best Social Security strategy for your individual situation.  Your Social Security office might be able to help you sort through your situation, although they are not trained to think strategically; they will primarily tell you what your benefit options and amounts are or could be. You can find some good information on the SSA.GOV website, and also at AARP.org.  Your best bet is to work with an advisor who has some advanced training and education on Social Security, who can run some projections to help give you more information to make the best decision for you.   Regardless of how you decide to do your research, we urge you simply to do that: DO YOUR RESEARCH; do not take your Social Security Benefit for granted.  If you project over your anticipated lifetime the amount of benefits that you could potentially receive from Social Security, you can begin to grasp what an important piece of your Lifetime Income this piece of the puzzle is to your financial well-being.

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