August 2, 2018

How To Decide When To Start Social Security


The Social Security Administration says that 21% of married couples and 43% of single seniors depend on Social Security for 90% or more of their income. 59 million Americans receive a monthly check, either for being over 65 or for a disability claim.

Those numbers tell the story: Social Security is important, or very important, to a large number of us. That leaves one of the key questions before the deposits start appearing in our checking account: when to start?


As I have written in earlier posts, there is no simple answer. Because there are so many variables no one can give you a fail-safe answer. Your best approach is to understand the factors that help you make the decision that right for you.


Let's start with the basis:



1. If you have worked at least ten years you are likely to qualify. The actual requirement is 40 credits, which occur at the rate of four for each full year of employment. Those 10 years do not have to be in a row, they just have to occur before you can claim benefits.


2. Your actual monthly benefit is based on your highest 35 years of earning. As point #1 above states, you don't have to work 35 years to qualify, but the amount you receive will be based on the highest income you earned if less or more than 35 years. This means lower earnings when you begin your career are usually replaced with higher earnings later in your employment history.


3. If you never worked, or not enough to get 40 credits,  you may still qualify for Social Security payments, either as the spouse of an employed person who does receive benefits, or because you qualify for disability payments. 


4. Deposits to your account run one month behind. When you sign up to start receiving payments, your first deposit will come the following month. Exactly when you receive your check each month is based on your birth date.


5. Social Security no longer sends physical checks through the mail. You must make arrangements for direct deposit. The other option is for your funds to be deposited into a special debit card that can be used like any debit card for purchases or to get cash at an ATM. 



Now, on to some of the fine print:


A. When you start receiving payments is up to you. The earliest is when you turn 62. The first payment will arrive the next month. Staring at 62 will reduce your monthly check by about 25% from what you would receive if you waited until you reach your full retirement age (FRA). For most of us that is 66. The FRA varies by your birth year, moving up two months for every year after 1954. So, if you were born in 1955, your FRA is 66 years and two months.


B. You can start receiving payments at any time after your 62nd birthday until age 70, at which point your check will be approximately 30% higher (depending on your exact FRA). There is no reason to wait past 70 since benefits do not increase after that date. You are just leaving money with the government that you will never get.


C. You lose $1 in Social Security benefits for every $2 you earn if you start before your FRA, continue to work, and earn over $1,420 a month. There is a different calculation in the year you reach your full retirement age that lessens this penalty.


D. After your full retirement age, there is no reduction in Social Security payments regardless of how much you earn.


E. Social Security benefits are taxed depending upon your total income and marital status. If you exceed the rather low minimums set by the government, between 50% and 85% of your Social Security income will likely be taxed. And, yes, your Social Security counts as part of your total income to determine if it will be taxable. 



Ok, so now that you have a grasp of the basis, when should you start taking the monthly benefits? Here is what to consider:


1. Do you need the maximum amount of payment to make your financial picture work? Do you have enough other income, or will you keep working until at least 70? If so, it is suggested you start Social Security when you turn 70. Your benefits will be at their highest level for the rest of your life. 


2. Do you need income now to keep things afloat or as additional income while still working? Start at 62 or any year after that until 70. Your check will be permanently reduced, but maybe not enough to make up for the loss of cash now. For example, I began taking payments at 64. Waiting until 66 would have meant only $132 more per month which didn't seem worth it. 


3. Spousal benefits require another calculation which is beyond the scope of this post. Basically, you can get an amount equal to half of your spouse's check, or your own amount if that is higher. Social Security will figure out the proper combination to insure your monthly check is the maximum allowed. Obviously, this benefit is not available to single folk.

4. If married and your spouse dies, there are other provisions to provide benefits based on the amount your partner was receiving. I have provided some links below if you'd like more details.

5. Divorced? There are rules for that, too. See the link below.


When your start your Social Security payments takes some thought and planning. Frankly, though, it is not as complicated as some financial experts like to make it. Start when receiving that monthly payment fits your current needs, situation, and future projections.

Any questions? Leave a comment or drop me an email and I will try to clear up any confusion!


Spousal Benefit Regulations

Widow/Widower Survivor Regulations

Divorced Regulations


22 comments:

  1. Just a correction note: my husband was born in 1955 and his full retirement age is 66 and 2 months. The age changes by 2 months every year after that until 67 is reached - for instance I was born in 1957 and my full retirement age is 66 and 6 months.

    ReplyDelete
    Replies
    1. My eyes must have glazed over by that point. Yes, you are right. I have changed the post to reflect the 2 month delay per year for those born after 1954. At this point 67 is the maximum FRA, but never put it past Congress to make another change.

      Delete
  2. I retired at 63. One of the main reasons for making the choice easier was SocSec. Not for the obvious reason however. We had adequate savings. I had a delightful part time job that I would hold for the next 10 years, and my wife was a public school kindergarten teacher.

    Our youngest daughter was 14 when I stepped down from my university academic career. I did not know until I filed for SocSec that I could get a significant monthly check for her as well as mine and that it would continue until she turned 18. This check was a blessing. It allowed us to have additional room to financially “breathe” and the check was almost as much as mine.

    We used half of the money to defray expenses and half went into her college fund. With the money saved over those 4 years she was able to attend the premium private
    University that she had “prayed” to attend, and from where she graduated 4 years later after she turned 22.

    SocSec was her “Godsend”. It was ours as well. She has done very well financially since graduating and her taxes are significantly repaying the amount received.

    ReplyDelete
    Replies
    1. I am sure the obvious question others with younger children are asking is what part of Social Security allowed for your daughter to receive the payments? If it was disability-based, please don't feel the need to share specifics. But, if not, that is an interesting situation. I thought this only occured if a parent died or was disabled.

      Delete
    2. Good question. I am not disabled. I was just retiring. When I went to the local Social Security office to discuss my retirement specifics the lady who was my “counselor “ specifically told me that I was eligible to receive assistance for my daughter. I did not know of this benefit but graciously took it. I am not mentally, physically or any other way handicapped, just old. Well, my wife just told me I am becoming more mentally handicapped each day. I am 76 now and my gray matter is grayer than my hair.

      But, as I said it is a benefit that I was glad to receive.

      Delete
    3. Thanks for the follow up, Jack. I was unaware of such a provision.

      Delete
  3. I don't know the ins and outs of U.S. Social Security (so there may be considerations I am not aware of) but my view is that if you can afford to wait and you don't have any serious health issues, you are probably better off waiting until 70 to collect. Doing so also lowers your longevity risk. Longevity risk is the risk that you live a long life and outlast your money -- which most surveys put as the top concern of retirees.

    By delaying you are opting for the maximum inflation indexed pension payment for life plus you transfer longevity risk from your own savings to the government. Live to 115 and you'll still be getting your check every month. This frees up my own savings as I don't need to keep so much back just in case I live a lot longer than I'd planned.

    ReplyDelete
    Replies
    1. There are situations where waiting is not the best choice but, the majority of financial experts suggest the same thing: delay as late as you can without harming the quality of your life before the deposits start.

      , but

      Delete
  4. Here in Canada we have the Canada Pension Plan (CPP), which is very similar to your Social Security. Our normal retirement age is 65, but we can start collecting a reduced CPP at 60, or wait and get a larger payment at 70.

    The main consideration I see people advised to think about is life expectancy. For many, it seems the "break even point" is around 74 years of age. That is, it takes most people that start receiving their CPP at 65 until age 74 to get as much in pension payments as those who started receiving it at 60.

    Therefore, if you have a family history of people dying at 67, you might want to consider taking the pension as early as possible. If you come from a family of people that live to 95, maybe 70 is for you.

    ReplyDelete
  5. Related to this - as noted previously, in the US you also get the largest monthly payment by waiting until age 70. However, you must live to 82 to reach the "break-even" point compared with starting payments at FRA (usually 66 in the US). So, yes, definitely consider how likely it is based on both health history and family history that you will live to collect the difference.

    ReplyDelete
  6. Both Dave and Anon are correct. Not starting until 70 in either country means you will receive the largest monthly amount. But, it also means that between the age when you start (62 or later in U.S. and 60 or later in Canada) and 70, you are not receiving thousands, potentially tens of thousands of dollars that would have been paid to you. From what I've read it takes, on average, 8-10 years to make up that unclaimed money if you wait until 70. Of course, from that point on you are getting more per month for the rest of your life.

    So, it does become a personal decision that depends on your financial situation and whether receiving money earlier is worth the tradeoff of a smaller monthly deposit for the rest of your life.

    ReplyDelete
    Replies
    1. It is interesting that the number one concern of retirees is often living a long time and running out of money (so you should defer to 70 if you can afford to do so) yet it seems most people want to grab the money early because they fear they might die and leave money on the table. These concerns are the 2 sides of the same coin and it's either going to come up heads or tails but there's no way of knowing ahead of time.

      If you need the money to put food on the table now, it's a no brainer. However, in terms of risk, leaving money on the table is much less of a problem than living a long time and not having enough money. Plus if you die early Social Security is not really your problem -- you won't be around to worry about it.

      Of course it is a personal decision and whichever way you decide you'll only know if you made the right choice when you know the date that you will shuffle off this mortal coil.

      Delete
  7. I had every intention of waiting until 66 to collect social security but healthcare and dental costs took most of my emergency fund and I signed up a few months after my 62nd birthday. I have not regretted my decision. My maternal side is short lived and my paternal side lives well into their 90's. Don't know which side I will take after.

    ReplyDelete
    Replies
    1. I started at 64 for specific financial reasons and have found it was the correct decision for me.

      Delete
  8. My wife and I decided to start taking Soc Sec at age 66 (our FRA), instead of waiting until age 70. Our primary motivation was to get this taken care and "out of the way" while we are still in good mental shape. We are not expecting any quick decline in capabilities but the future is always uncertain.
    Our goal is to simplify all of our financial matters to minimize potential problems in the future and this was one the steps.

    ReplyDelete
    Replies
    1. Depending on your particular situation the difference in monthly income may not have been enough to "leave money on the table" for four years. I certainly felt that way!

      Delete
  9. My husband started getting his SS at 64 years old. I assumed that when I turned 64 I would get half of his amount when I applied for spousal benefits, but this was incorrect. By applying before 66 years old my amount would have been reduced. I had to wait until I was 66 to get half of what he got at 64. Be sure you read those spousal benefits regulations carefully before applying!...Glenda

    ReplyDelete
    Replies
    1. You are correct. The spouse must wait until his or her FRA before the 50% benefit.

      Delete
  10. Because I'm a single woman with no children and because I've always been good at living simply and frugally, I worried a lot more about running out of money before I died or not being able to keep up with inflation than about being able to support my current lifestyle. For that reason, I opted to wait until 70 to get the highest possible Social Security benefit. Right now, my monthly Social Security benefit is actually larger than my monthly budget, which provides a cushion against inflation. In addition, the required minimum distributions from my retirement fund are being reinvested as insurance against a time when my monthly expenses will likely be much higher.

    ReplyDelete
    Replies
    1. To have your Social Security benefit be more than your monthly budget is a great position to be in.

      Like you, we are considering reinvesting all or part of my RMD from my IRA when I have to start taking out money next year. If I don't have it in a checking account I am less likely to spend it on something unneeded.

      Delete
  11. There isn’t one best answer to this question. Because the values and dates of starting to take the payment are based on actuarial data, if you live exactly an average length of life, and don’t consider any other variables, the financial benefit will be the same for you whether you start as early as possible, at the midpoint, or as late as possible. But this calculation is based on aggregate statistics. Each individual’s circumstances will differ, which may include current health status, family history of longevity, whether an early payout is needed to support a satisfying current lifestyle, level of risk tolerance (e.g., fear of outliving your savings), ability to defer gratification, whether the SS payout’s coverage of current expenses will allow your investments to continue to compound longer before drawing them down, whether you have a pension top-up that bridges you to the age that you are eligible for the full SS, your tax bracket, your mix of tax-deferred and tax-free savings, and so on. I have found it helpful to talk through various scenarios with a financial advisor.

    Jude

    ReplyDelete
    Replies
    1. Your rundown of some of the variables is a good example of why financial decisions require thoughtful consideration. Any blog post (including this one) or website will get you partly there, but each of us must do the hard part: thinking through all our options and circumstances.

      Delete

Inappropriate comments will be deleted