When Should You Take Social Security?
Deciding when to take Social Security benefits is one of the most important decisions you will make for retirement. You may either base the decision strictly on monetary benefits, or your decision may be more personally based.
The important question is when to start taking benefits, at age 62 or postponing benefits until age 66, or even later. The answer is different for everyone, as it depends on various factors such as health, lifestyle, and marital status.
The amount of your monthly benefit depends on two variables, when you elect to start receiving them, and how much you’ve earned during your working years. Interestingly enough, how many years you have contributed to Social Security can’t be changed, yet the option as to when you start taking the actual benefit payments is all up to you.
To determine how much you have earned, the Social Security Administration adds up the income subject to Social Security tax adjusted for inflation during your 35 highest-earning years. It then divides that total by 420, the number of months in 35 years. This figure arrives at your average indexed monthly earnings. The higher this is, the higher your benefits will be.
The Social Security Administration designs the benefit formula based on an average, so the same amount of lifetime benefits is calculated irrespective of when you begin receiving payments. The U.S. Government Accountability Office (GAO) explains this in a report on social security retirement saying “the Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim”.
When it comes to deciding as to what age to start taking benefit payments, various strategies and philosophies come into play. The calculated benefit amount per the Social Security Administration is known as the “full benefit”, in essence providing 100% of the calculated benefit due.
The caveat is that you need to have attained your Full Retirement Age (FRA) to take the full benefit amount. If born between 1943–1954, your FRA is 66. If born after 1954, your FRA is between 66 and 67. If you elect to receive earlier, then your monthly benefit is reduced for each month short of your 66th birthday. For example, if you begin receiving them at age 62, then your benefit will be reduced by 25%, which is usually permanent.
Conversely, if you wait until turning 70, then you are entitled to delayed retirement credits, which increase your benefits by 8% for each year of deferment, capping out at a total of 32%.
Financial Factors to Consider
So how do you determine the optimal age to take benefits and whether or not waiting may be worthwhile? Madison can perform a break-even analysis calculating how much more in benefits you may get, either by waiting for a higher benefit say age 70, or taking a lower benefit at a younger age such as 62.
Essentially, if you decide to wait, then you lose out on payments you could have been receiving since age 62. If you wait, yes the benefit payment will be higher, but you may end up receiving less overall benefit payments if you die sooner than expected. In general, life expectancy has increased over the years. Today, the life expectancy of a 65-year old is about 20 years, whereas in 1940, it was 14 years beyond age 65.
Your payments are subject to automatic increases based on inflation, also known as cost-of-living adjustments or COLAs which have been in effect since 1975. Over the years, recipients have received varying increases depending on the inflation rate. With low current inflation levels, increases in benefit payments have been subdued relative to years with higher inflation.
The COLA adjustment for 2018 is 2.0%, a steep increase from the 2017 adjustment of only 0.3%, and the largest increase in benefits in six years. The 2% increase in benefit payments becomes effective in late December 2017 for disability beneficiaries and in January 2018 for retired beneficiaries. COLA should be configured in your break-even analysis.
Personal Factors to Consider
Personal factors are also a consideration, since a break-even analysis tells you nothing about these relevant and important issues. Important personal factors to consider include health, family life expectancy, marital status, immediate financial needs, and quality of life.
For example, if you have health ailments and suffer from medical conditions that may prohibit you from enjoying a lasting quality of life, it may make sense for you to take the benefits at an earlier age.
If you are married and about to become eligible for benefits, then perhaps one partner should take the benefit first, with the second postponing benefits until an older age. The postponement of the second would yield a higher payment when benefits would begin.
Regardless of what your factors might be, careful review of all of your options from a financial and personal viewpoint is prudent in order to arrive at the best decision for you.
Sources: Social Security Administration, GAO