Whether you are working on a financial plan, or actually getting close to retiring, one of the biggest retirement decisions you will have to make is when you will start to claim Social Security benefits. There are more considerations than you may be aware of, especially if you are married, and choosing the best strategy will require some careful thought. In some cases, it may even be advantageous to use some of your retirement savings to help pay expenses (if needed) for a year or two in order to delay claiming until you will be able to receive your full benefit amount. The following is meant to highlight some of the Social Security rules that you should be aware of, but is in no way inclusive of all options that may be available. The best place to start is by creating an account on the Social Security web site (www.ssa.gov) so that you will have the most reliable information about your specific benefit, and can get accurate answers to any questions that you may have.
Once you have an account on the Social Security web site, you can review your annual earnings history. It's crucial that you make sure that this history is correct, as your benefit will be based on it. Your top 35 years of earnings are used to calculate the average indexed monthly earnings, and then a formula is applied to determine your estimated benefit at Full Retirement Age (FRA).
For those born after 1959, the Full Retirement Age is age 67 (age 66 for those born before 1960). You can start to claim benefits as early as age 62, but be advised that your benefit will be reduced for each year that you claim before age 67. The reduction is permanent! For example, if your estimated FRA benefit at age 67 is $2,000/month, it would be $1,400/month at age 62 (30% less). That's a difference of $7,200/year, or $180,000 over 25 years. There can be many reasons to claim early, but take your time making that decision. For every year that you wait to claim your benefit after age 62, the benefit increases ~8%/year, up until age 70. That's right, while your "full" benefit is $2,000/month at age 67, you can receive an added bonus of ~8% per year for each year that you wait to claim from age 67 to age 70. Your maximum benefit at age 70 would then be $2,480/month (it won't increase after age 70). Choosing the specific age that you will start to receive benefits can have a far reaching impact over the entire term of your retirement.
If married, your spouse can also receive benefits based on their own earnings history. If they have no earnings history of their own, they may still be entitled to benefits based on your earnings history (they would receive a smaller percentage of your benefit). This makes choosing the best age to claim benefits even more important, since it will affect the combined amount that you will receive. If you and your spouse will claim based on your individual earnings, you will want to coordinate at which age each of you will start claiming. This gets complicated as there are as many as 19 different claiming strategies, and you will want to make sure that you maximize your income potential. Take the time to think through which option will be best based on whose benefit will be greater, and at what age, as it affects your income potential for the rest of your life.
Ex-spouses also may be entitled to benefits based on their former spouse's records. They would need to decide between their own benefit or a portion of their ex-spouse's benefit, as they can't receive both.
If both spouses are collecting benefits, and one spouse dies, the surviving spouse can decide to keep the greater of the two benefits, and give up the other one (they can't keep receiving both). If a spouse dies before collecting benefits, the surviving spouse can collect a benefit as early as age 60 (instead of 62) based on the deceased spouse's earning history. The benefit would be reduced for each year before their full retirement age. They would receive 100% of the benefit if they waited to claim until age 67. Depending on the amount of the benefit, they could claim the survivor benefit, and delay taking their own benefit until age 70 (they would switch benefits at that point), in order to maximize their benefit after age 70 .
It's also not just spouses who are eligible for benefits. Dependent children, who are under age 19 and still in high school, are eligible for ~50% of a parent's claimed benefit. This may be helpful for people who have children, or adopt children, a little later in life.
For those who may decide to keep working after you claim benefits (yes, you can do this), be aware that there are limits on how much you can earn between ages 62 and 67 without affecting your benefit amount. If you are under age 67, and have wage income, Social Security will deduct $1 from your benefit for every $2 that you earn above $21,240 (the 2023 threshold). Your benefit will not be reduced once you reach full benefit age.
One last point - many people don't realize that Social Security income may be taxed. Social Security Benefits are taxed based on your Combined Income and your tax filing status. Combined Income is defined as: adjusted gross income (before tax deductions) + taxable retirement distributions + 50% of S.S. benefits. Up to 50% of your benefit may be taxed if you are married, with a combined income of $32,000 - $44,000 ($25,000 to $34,000 if single). Up to 85% of your benefit may be taxed at higher income levels. This can have a significant impact on your income during retirement, and needs to be accounted for in any financial plan.
When it comes to your Social Security benefit, do your due diligence.
- Set up an account on the Social Security web site.
- Check your earnings history there to make sure that it is correct.
- Use one of the calculators provided on the Social Security site, or your own Social Security statement,
to get a projection of your benefits.
- Carefully think through what the best age will be for you to start claiming benefits.
If married, factor in the timing of when your spouse will start to claim benefits as well.
- Make sure that you understand all of your options - it's not always straightforward.
This is a decision that will have a far reaching impact on your income for many years, and everyone will have different reasons for why they make the decision they do. Take the time to make sure that your decision is right for you.