Chances are, Social Security will constitute a major income source for you in retirement, which is why the decision to file shouldn’t be taken lightly. Eligible seniors get an eight-year window to claim benefits that begins at age 62 and ends at age 70 (technically, you’re not forced to file by 70, but there’s no financial reason to wait past that point). Smack in the middle of that window is full retirement age, or FRA, which is the age at which you’re entitled to the full monthly benefit your earnings history entitles you to.
Many seniors prefer not to wait until FRA to claim benefits, and instead file as early as possible at age 62. Doing so, however, causes a reduction in benefits. In fact, for each month you file ahead of FRA, your benefits take a small hit. File well before FRA, and those benefits will take a pretty big hit — 30%, in fact, if you claim Social Security at 62 with an FRA of 67.
On the other hand, by waiting past your FRA to claim benefits, you’ll accrue delayed retirement credits that boost your benefits by 8% a year up until age 70, at which point those credits cease to accumulate. Filing for Social Security at 70 with an FRA of 67 will therefore boost your benefits by 24%.
Clearly, the age at which you sign up for Social Security will dictate how much monthly income you collect in retirement. As such, be sure to keep the following factors in mind when making that decision.
1. Your earnings level
You are allowed to collect a paycheck and receive Social Security benefits at the same time. But unless you’ve already reached FRA, doing so will reduce your benefits in two ways.
First, you’ll be hit with the general reduction that comes into play when filing before FRA. Secondly, if your earnings exceed a certain level, you’ll have a portion of your benefits withheld as a result (though not permanently — they’ll be added back into your monthly payments once you reach FRA). For the current year, that second part comes into play if your earnings exceed $17,640. If you’ll reach FRA later in the year, that earnings limit is higher — $46,920. Therefore, unless you really need the money from Social Security right away, it might pay to rely on your regular paycheck and let your benefits grow.
2. Your savings level
Social Security was never designed to sustain retirees by itself. That’s why workers are encouraged to build independent savings to ensure that they have enough money to pay the bills once they stop working. Many Americans, however, do a poor job of saving for the future, and thus enter retirement with little money socked away. If you’re one of them, then you’ll likely depend quite heavily on Social Security once your career comes to a close. And if that’s the case, it means you should make every effort to file as late as possible. That way, you’ll grow your benefits and secure the highest possible monthly payment based on your earnings record.
3. Your health
One interesting thing about Social Security is that it’s designed to pay you the same total lifetime benefit (meaning, the sum total of all of your monthly payments) regardless of when you file. Here’s how that works, in theory: Say your FRA is 67, but you file for Social Security at 62, thereby reducing your monthly payments by 30% but collecting 60 more in your lifetime. Conceivably, those two points should cancel each other out, thereby resulting in a break-even situation.
There’s just one catch: You need to live an average life expectancy for that formula to work. If you pass away sooner than the average senior, you’ll lose out on money by waiting to file, and you’ll come away with more money in your lifetime by taking benefits as early as possible. And if you pass away later than the average senior, you’ll get more out of Social Security by filing as late as possible.
Therefore, you’ll need to really evaluate the state of your health when deciding when to claim benefits. Though your health won’t be an absolute predictor of when you’ll ultimately pass, it can give you an indication as to whether or not you’re likely to live a long life, and from there, you can decide on the right time to file.
Think about your employment status and earnings, your savings level, and how healthy you are before taking the leap and signing up for benefits. The more thought you put into your decision to claim Social Security, the more likely you’ll be to land on the right age.
