Social Security benefits play an important role in providing financial security during retirement.
However, determining the ideal time to start receiving these benefits can be a challenging decision.
It's essential to carefully consider various factors to maximize your Social Security income and ensure a comfortable retirement.
In this article, we'll explore key considerations that can help you make an informed choice about when to start your Social Security benefits.
Full Retirement Age (FRA):
Full Retirement Age (FRA) is the age at which you can collect Social Security benefits without needing to worry about earning limits.
Once you reach full retirement age (FRA), you can start social security benefits even if you're still working full-time and not receive any earnings penalty regardless of your income.
Full retirement age varies depending on your birth year.
The table below shows how year of birth corresponds to full retirement age.
Earnings Limits:
Your employment status is part of what will influence the decision for when to start social security benefits.
For those still working, starting benefits before full retirement age (defined above) may result in a reduction benefits due to the earnings limit imposed by the Social Security Administration.
The table below shows earnings limits and potential penalties as of 2023.
For example, if someone starts benefits at age 62 and earns $41,240 for the year, they'd be $20,000 above the 2023 earnings limit and would be assessed a $10,000 earnings penalty as a result.
Generally, it's not good to start social security benefits if it's clear you'll be assessed an earnings penalty.
As stated earlier, once you reach full retirement age, you can start benefits even if you're still working full-time and won't be assessed an earnings penalty regardless of your income.
Spousal Benefits:
For those who are married or have been married in the past and have a relatively low earnings history, social security spousal benefits may be more attractive than your own social security retirement benefit.
In the example below, Mary and Jim are married.
Mary was the higher earner throughout most of their working lives by a fairly wide margin.
As a result, Mary's social security retirement benefit at her full retirement age is $2,600/mo and Jim's social security retirement benefit at his full retirement age is $800/mo.
The large difference in their benefits is due to the fact that social security benefits are determined based on your earnings history.
The more someone earns, the more tax they pay into social security, and the more benefits they receive in retirement.
Once Mary files for her benefits, Jim can either:
Collect his own retirement benefit of $800 per month
The spousal benefit which is equal to 1/2 of Mary's full retirement benefit, or $1,300 per month.
Jim is takes the spousal benefit and receives an additional $500 per month as a result of doing this ($1,300/mo vs. $800/mo).
In this example, Jim is at full retirement age when he starts collecting spousal benefits.
Jim only receives the maximum spousal benefit equal to 1/2 of Mary's if he starts collecting benefits at his full retirement age.
He could start collect spousal benefits earlier than full retirement age as long as Mary is also collecting her retirement benefit, but the spousal benefits will not be 1/2 of Mary's and would instead be reduced similar to how retirement benefits are reduced for starting early (discussed more below).
Jim collecting spousal benefits doesn't reduce Mary's benefit.
Mary needs to have started collecting benefits for Jim to receive spousal benefits.
Survivor Benefits:
For those who are married or have been married in the past, you may be entitled to social security widow or widower benefits, also known as survivor benefits, once the first spouse dies.
In the example below, Mary and Jim are married.
Mary is collecting $3,000 per month in social security retirement benefits and Jim is collecting $1,500 per month in social security retirement benefits.
Mary dies first.
When Mary dies, Jim switches from collecting his retirement benefit ($1,500 per month) to the survivor benefit.
The survivor benefit is equal to Mary's retirement benefit of $3,000 per month in this example.
Jim stops receiving his $1,500 per month retirement benefit, but starts receiving a $3,000 per month survivor benefit instead.
For married couples, when the first spouse dies, the smaller of the two benefits stops and the larger of the two benefits continues as the survivor benefit.
Retirement Benefits:
Assuming you've paid social security taxes during you're working career, you can receive social security retirement benefits as early as age 62 (subject to the earnings limits discussed earlier).
Social security retirement benefits are calculated based on your highest 35 years of earnings.
The more you've earned and the more tax you've paid, the more you receive.
Benefits increase by about 0.66% per month, or 8% per year, for each month you delay receiving benefits until age 70 at which point there's no longer an incentive to delay.
The example below shows Mary's social security retirement benefits if she starts at age 62, age 67, and age 70.
She find this information about her benefits from a social security statement found within her personal online portal she setup at ssa.gov
So when should she start collecting benefits?
If she starts earlier, she'll receive more payments over the course of life, but the monthly payments she'll receive will be smaller.
If she starts later, she'll receive fewer payments over the course of live, but her monthly payments will be larger. We'll look at another example using John...
The table below shows John's social security retirement benefits at his actual retirement (age 65) vs. his social security full retirement age (66 + 10 months) vs age 70.
John is retiring at age 65.
He's wondering if he should:
1 - Start collecting social security at retirement, which will allow him to use less of his own money to fund his expenses early on in retirement.
2 - Delay social security benefits, which will require him to use more of his own money initially, but will provide him with a larger monthly check from social security for life.
By the time John reaches average male life expectancy around age 85, he'll have received:
$704,000 if he starts collecting at age 65
$728,000 if he starts collecting at age 66 + 10 months
$729,000 if he starts collecting at age 70
The difference isn't as large as he expected before running the numbers.
No matter how much analysis John does in advance, there's no way he'll know up front which age for starting social security will work out best for him over the long-term.
Some factors that are unknowable when deciding what to do include:
1 - How long he will live
2 - How long his spouse will live if his benefits were the larger of the two
3 - The rate of return he will earn on other investments that he would have needed use if he decided to delay social security
4 - The future of the social security program
John's had some health issues and he wants to do his bucket list items now while he's still able to do them health wise, so he thinks getting the money now would provide more value in his life vs. getting the money later.
As a result, he decides that starting social security benefits at his retirement is best for him. "If someone offers me an option to take money now and it's not CLEARLY better for me to delay taking the money, I'll take the money now", he says.
However, what he decided might not be appropriate for you.
Deciding when to start Social Security benefits is a complex decision that requires careful consideration of numerous factors.
Engaging your retirement advisor can provide valuable guidance based on your unique circumstances.
By carefully weighing these factors, you can make a decision about your Social Security benefits that makes sense for your own unique situation within the context of your overall retirement plan.
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This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures