The Decision to Claim Social Security: A Comprehensive Guide for Retirees
“Just tell me how long you’ll live, along with a few other assumptions, and I’ll tell you the best claiming strategy for your Social Security.”
Of course, that is a ridiculous ask, but it highlights the challenging nature of deciding when to claim Social Security. The best we can hope for is to decide after being informed of all the decision points, considerations, and tradeoffs. Hopefully, this deep dive into the subject provides you with everything you need to make an informed decision.
Understanding Social Security Benefits
Social Security benefits are calculated based on your highest 35 years of earnings. The age at which you choose to start receiving benefits will affect the amount you receive:
- Full Retirement Age (FRA): For most people, this age is between 66 and 67, depending on your birth year.
- Early Retirement: You can begin receiving benefits as early as age 62, but your benefits will be permanently reduced by up to 30%.
- Delayed Retirement: If you delay claiming benefits past your FRA, your monthly benefit will increase by about 8% per year until age 70.
Key Considerations
Now that we have established the basics let’s get into the considerations you will face when deciding:
Longevity and Health
Rule of thumb: the longer you wait to claim Social Security, the more you hedge the risk of outliving your money.
There exists a breakeven point for all claiming strategies where the higher benefit amount received per month will outpace the head start you would have garnered by claiming earlier. For those of you with stellar health and a track record of good family health, claiming later could be the way to go. This way, you ensure higher monthly payments for a longer period, which can significantly enhance your financial security in your later years. On the other hand, if you have serious health issues or a shorter life expectancy, claiming earlier might make more sense. This way, you can take advantage of the benefits while you're able to enjoy them.
Financial Needs
The previous point is moot if you need the money. Turning on the spigot earlier makes sense if you need a steady monthly income to meet basic needs like housing costs. Now is a good time to highlight the benefit of starting early on your financial plan. If you begin to look for ways to meet your spending needs after you hand in your retirement papers, chances are you’ll be behind the eight ball.
Don’t get caught by surprise.
One factor that will be key in this analysis will be the percentage of your income that is projected to be “steady.” This money could be in the form of a pension, annuity, or rental income. Trading security for upside potential is one of the many decision points for retirees. We have a tool to visualize this for clients:
Employment Status
Claiming Social Security while still earning a paycheck is usually not a smart idea before your full retirement age (FRA). This is due to income limits imposed by the Social Security Administration. Your benefits could be reduced in those years AND you’ll have locked in a lower monthly amount for the rest of your life. Double whammy (although you do get credits for any reduction in benefits once you hit your FRA). Once you reach FRA, there are no penalties for working and receiving Social Security benefits simultaneously, giving you the best of both worlds.
Spousal Benefits
Don't forget about your spouse.
This is good advice in general, but especially regarding Social Security benefits.
Your spouse may be eligible for benefits based on your work record, which can be up to 50% of your benefit amount. This is especially important if one spouse has significantly lower lifetime earnings. Additionally, if you pass away, your surviving spouse may receive your full benefit amount if it is higher than their own. Delaying benefits can maximize this amount, providing greater financial security for your spouse.
Pros and Cons of Claiming Strategies
Now, let's dive into the pros and cons of different claiming strategies:
Claiming ASAP or before FRA
Claiming Social Security benefits early, before your FRA, can provide immediate income, which is a significant advantage if you need the money right away. This can be especially beneficial for those with health issues or shorter life expectancies. Additionally, claiming early can allow one spouse to claim benefits while the other delays, maximizing survivor benefits. However, keep in mind that claiming early results in permanently reduced benefits, up to 30%, and your benefits may be reduced if you continue to work and earn above the annual limit.
An under-appreciated benefit to claiming early is investing the money if you don’t need it for expenses. The typical “breakeven age” for Social Security timing usually falls around age 80. However, if we assume the benefit is reinvested at a reasonable 6% per year, that age gets pushed out to around 90. Another benefit to this method is that the accumulation of investments can pass to non-spouses via an inheritance.
Claiming at FRA
Claiming at your FRA ensures you receive the full benefit amount you're entitled to without reductions. You can also work without any reduction in benefits, providing more flexibility. This strategy offers a balanced approach between early and delayed claiming. However, you miss out on the 8% annual increase that comes with delaying benefits.
Delayed Claiming (After FRA)
Delayed claiming can be an excellent strategy if you have the financial means to wait. Your monthly benefits increase by about 8% per year until age 70, which can significantly boost your income in later years. This also provides a larger benefit for your surviving spouse and offers better inflation protection since the higher initial benefits grow with cost-of-living adjustments. The downside is that you need other sources of income to cover expenses while delaying benefits, and the strategy is less beneficial if you don't live long enough to recoup the delayed benefits.
This is the "longevity hedge" we discussed earlier.
Common Pitfalls to Avoid
As you consider your options, be mindful of common pitfalls.
- Not considering your personal health and risk factors before claiming
- Not factoring in your spouse’s potential benefits
- Claiming while you are still earning a paycheck before your FRA
Conclusion
The decision to claim Social Security is multifaceted and should be made with careful consideration of your individual circumstances, financial needs, and long-term retirement goals. We are here to help walk you through that process.
Reach out to us using the form below to schedule a time to talk.