When it comes to retirement planning, you may have heard a lot about the benefits of tax-advantaged retirement accounts, how to choose investments, and maybe some of the details of any pension plans that you’re fortunate enough to have. But what about Social Security? After all, it provides the majority of retirement income for many Americans.
There’s really only one big decision you have to make about Social Security and that’s when to take it. Regardless of your full Social Security retirement age, which ranges from 65 to 67, you can collect retirement benefits as early as age 62 as long as you’ve paid into the program for at least 40 quarters or about 10 years. (Widows and widowers can collect survivor benefits as early as age 60.)
However, for each year you delay, your benefit increases by about 8% until age 70. Is it worth the wait? Let’s look at some factors to consider.
When do you plan to retire?
You can receive Social Security benefits once you’re eligible even if you’re still working, but there are a couple of downsides to this. The first is that your wages can cause more of your Social Security income to be taxed. (You can see the formula here.)
The second downside is that if you’re under your full retirement age, you lose $1 for every $2 you earn above the earnings limit, which is $18,240 this year. (Earnings only includes wages for this purpose and not investment income or pensions.) Once you reach full retirement age, your benefits are recalculated to recoup those lost benefits but it can take up to 15 years to break even.
Do you have assets to draw from while you delay benefits?
If not, you may not have a choice but to collect benefits. If you have enough other assets to cover your expenses, it may make sense to delay taking your benefits and allow them to grow by about 8% a year. Of course, you may not want to spend down assets that can be passed on to heirs. Keep in mind that you’ll want to keep some money in savings to cover emergencies as well.
How aggressive an investor are you?
By collecting Social Security benefits early, you can allow more of your investments to grow longer. However, they would have to grow by an average of 8% a year just to break even. The more conservative you are, the less likely that is to happen and the better off you’d probably be to spend down some of those investments and collect a higher Social Security check later that isn’t dependent on investment performance. On the other hand, a more aggressive investor may prefer to take Social Security benefits early and let more of their investments grow longer.
How worried are you about future reductions in Social Security?
The Social Security trust fund is projected to be depleted in 2035, at which time there would only be enough revenues to pay between 75-80% of the expected benefits. While the proposals to make Social Security solvent have generally involved higher taxes or reductions in future benefits, there’s no guarantee they won’t reduce payments to retirees, especially ones with higher incomes. If you’re concerned about that, you may want to get as much under the current benefit formula as you can before any reductions are made.
What’s your life expectancy?
All things being equal, if you live to the average life expectancy, you would get about the same amount of benefits no matter when you decide to start collecting. The longer you live beyond that, the more you can benefit by delaying benefits. Of course, no one knows for sure when they’ll kick the bucket. But you can get a free estimated life expectancy based on your gender, health, lifestyle, and family history from the Living to 100 Life Expectancy Calculator (along with suggestions to improve it) or a much simpler version at the Actuaries Longevity Illustrator.
What about Medicare?
You can enroll in Medicare at age 65 regardless of whether you’re working or not. You’ll probably want to at least enroll in Medicare Part A since it’s free. However, you may want to delay even Part A if you’ll lose HSA contributions or other insurance benefits from your employer so find out the effect on your benefits before enrolling. The decision about Part B is a bit more complex. You can learn more about it here.
As you can see, there are many factors to consider in deciding when to collect Social Security. There’s no right answer for everyone, but make sure yours is an informed one. If you’re still not sure, you may want to consult a qualified and unbiased financial planner. (Your employer may even offer you access to one for free through a workplace financial wellness program.)