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For the majority of retirees, Social Security and the income it produces will represent a significant portion of lifetime retirement income. Even for more affluent investors, maximizing Social Security benefits is a task worth striving for. Deciding when to collect Social Security is a never ending debate.
Making the election at the age that will allow you to maximize your benefit isn’t an easy task, however.
The age in which an individual should elect Social Security will vary. But it’s worth discussing how that decision should be made.
There are four key questions every retiree should ask to make sure the benefit is maximized:
- What other sources of income do you have in retirement?
- Are you married?
- Do you have plans to continue working?
- How is your health (and your spouse’s health?)
By answering these 4 questions, you’ll be able to have a clearer picture of a decision of when to collect Social Security at the right age.
Let’s briefly look at how your Social Security benefits are affected by the age you file.
Social Security Introduction
Regardless of your date of birth, you can collect your own Social Security between Ages 62 & 70. This is assuming you have 10 full years (or 40 quarters) of eligible work credit. If you are a qualified widow or widower, you could collect as early as Age 60.
Depending on your DOB, you will also have a Full Retirement Age (FRA). This age is either 66, 67, or at a date between those ages. There are some things to consider if you retire prior to FRA, at FRA, or wait until Age 70.
Collecting Before FRA
There are several reasons you may want to collect early. The first one that could be advantageous is due to a short life expectancy. For individuals who may have a chronic or terminal condition, there is rarely a good reason to wait to collect your benefit. If it’s determined that your life expectancy is shortened due to declining health, filing early should be high consideration.
Another factor to consider is an income need, specifically early in retirement. If you’re forced out of work and put into a position in which the income isn’t a desire, but a necessity, filing early may be your best option.
If you’re considered healthy with a relatively normal life expectancy, it’s a sound strategy to plan long term. The earlier you collect, the lesser your monthly benefit.
There are also strategic moves that you may consider, particularly in conjunction with other sources of income.
One such instance is if your spouse is a higher income earner. If this is the case, it may make sense to collect early. This will provide an income stream earlier in retirement. Meanwhile your spouse can delay, allowing him/her to increase their benefit base.
It may also make sense to collect early if you’re planning on not withdrawing any funds from a retirement account. However, it’s worth noting that this can sometimes be a gamble. This is especially true if your funds are invested in a non-guaranteed source.
Social Security benefits will grow at a guaranteed 8% each year you defer. It is rare, if not impossible (right now) to find an investment which can offer 8% guaranteed growth each year.
Collecting at FRA
Collecting at Full Retirement Age can offer a bevy of advantages. The first of which is that your benefit base is not decreased in any way.
Your benefit base would be trimmed depending on how early you’d file for your benefit in the event you decide to collect prior to FRA. But collecting at your FRA ensures you receive the full amount you’re entitled to.
The other advantage is that you’re not subjected to an annual earnings limit. If you collect early, any earned income in excess of $21,240 (2024 figures), you’ll have $1 of benefit withheld for every $2 you earn.
Once you reach the year of your FRA, but prior to your FRA, the limit goes up to $56,520. You’ll also only have $1 of benefit withheld for every $3 you earn. Once you reach your FRA, there is no earnings limit.
Deferring your Benefit until Age 70
Simply put, there is no benefit to waiting beyond Age 70 to begin collecting Social Security. If you’ve waited this long, or plan to wait this long, you can rest assured knowing you are getting the highest monthly income amount you’d be eligible for.
You enjoy all the same benefits as you would have collecting at your full retirement age. But you will get an 8% increase in each year you would’ve deferred.
If your FRA is 66, your benefit at age 70 would be 32% higher than at your FRA. If your FRA is 67, your benefit would be 24% higher than your FRA.
The 4 Questions You Need to Ask
Do I Need Income Now?
This may actually be a fairly simple question to answer, but it’s at least worth thinking through fully. The question on most everyone’s mind is “when can I retire?” But that question is so nuanced, it’s impossible to answer without further context.
For some people, the answer may be semi-retirement. They may give up full-time work (at a job they may not love). The can instead find a passion project that provides some monthly income.
Unfortunately, we’ve seen scenarios in which individuals are forced into an early retirement due to a health condition or disability. This may require a decision to be made in which an employee’s hand is forced rather than a voluntary decision.
For others, they may have sufficient income due to savings, part-time work, or a spouse who is working. But the lifestyle and monthly expenses could require a monthly shortfall that needs to be filled.
Additional Disclaimer!
What is not recommended is a rash decision in which an individual has not planned for a longer life expectancy, decides to retire & collect the early benefit, and does not have other sources of income.
Collecting prior to FRA can have some dire consequences.
One of the most dire if you collect early with no other sources of income. If you experience a long retirement, Social Security income alone is unlikely to keep up with rising costs.
Regardless, a cash flow analysis should be completed and a monthly budget should be reviewed. Once complete, you may determine that you do indeed need additional income now, in which case, you should consider collecting Social Security early. If that is not the case, you should move along to the next question to ask.
What are my Sources of Income in Retirement?
Social Security will represent a significant portion of income for most middle-class retirees.
It’s rarely the only source of income.
Depending on both the voluntary savings of the taxpayer and any company-provided benefits, Social Security can be part of a retirement income plan, not the sole retirement income plan.
Pension Benefits
For the fortunate retirees whose employer offer a defined benefit plan (otherwise known as a pension plan or lifetime annuity), it’s worth evaluating the monthly benefit that you’re entitled to.
By evaluating your discretionary & essential expenses, you’ll be able determine your income needs. This will clarify which age you should file for your benefits.
Retirement Savings
Qualified Savings Plans, such as a 401(k), 403(b), 457 Plan or Traditional & Roth IRAs are common savings plans that retirees will have in conjunction with Social Security.
It’s important to distinguish a few things with these plans:
- depending on how they’re invested often offer the potential for higher returns that will keep pace with inflation over the long term
- but are subject to more severe market fluctuations as well.
As a result, it’s important to formulate a retirement income strategy to manage the risk of these accounts while also providing the income necessary to cover expenses.
Strategies to Consider if you Have Both
There are two potential paths an individual can consider.
The first is a Social Security “Bridge” strategy.
This strategy is for individuals who would like to consider collecting their Social Security benefit early. They instead opt to use their retirement savings to replicate that income.
By utilizing the retirement funds, rather than the income provided from their Social Security, they can defer their benefit. This allows the retiree to take advantage of the 8% guaranteed increase Social Security offers.
Conversely, a strategy to consider is the deferral of withdrawing from retirement accounts, and instead utilizing Social Security early to allow for growth in your outside accounts. Keep in mind, depending on how these outside accounts are invested, they may be subject to some level of risk.
If you have no other sources of income in retirement, and your plan is to stop working, it may be worth considering a strategy in which you collect early.
As mentioned above, the decision to collect early with no other sources of income can become especially problematic as costs continue to rise in retirement.
Making this decision with the criteria mentioned can pose cash flow deficits in future years as expenses rise. If it’s determined that you do not need the income, you should ask yourself the next question before considering claiming.
What is my Life Expectancy?
Yes, I know. We don’t know this answer. But thanks to actuarial estimates, family dynamics, and a general sense of our current health, we can estimate and best decide when to collect Social Security.
As you approach retirement, it’s not a bad idea to have a check-up/physical if you haven’t had one recently, as this can indicate if you’re considered to be in good health.
Assuming you are, and you have longevity in your family tree, it’s better to prepare for a longer retirement than a shorter one.
In the event you have a shorter than average life expectancy, it may be best served to collect early and maximize your earning potential.
If you’re unmarried, and you do not need the income now, and you have other sources of income in retirement, delaying your benefit may be the most prudent action to take.
If it appears your life expectancy is longer than the average (and a good longevity calculator may help determine this), and you’re married, you should ask yourself the next question.
I’m Married – How Does This Decision Affect my Spouse?
No spouse wants to disinherit a surviving spouse. So when to collect your Social Security benefit should be properly thought out if you’re married.
There are a bevy of factors that could be at play for a couple when it comes time to make your decision, but some of the most common include your spousal benefits, survivor benefits, and the age difference between spouses.
For couples who have a spouse who is and has been the primary breadwinner, his/her income could be significantly higher than the other spouse’s own benefit (if he/she has a benefit at all).
In these circumstances, if 50% of the primary earner’s benefit is higher, the spouse can claim this amount as the spousal benefit.
The maximum the spouse can earn is 50% of a spouse’s FRA. The spouse must wait until he/she reaches FRA in order to claim this benefit. By delaying, it could significantly increase the monthly income from Social Security.
Survivor Benefits
Survivor benefits may also be a major consideration for retirees.
For spouses who have a significant difference in Social Security benefits, it could provide the surviving spouse (who is not the breadwinner) a significant advantage by having the higher earning spouse delay benefits until age 70.
This is because the surviving spouse would receive 100% of what the deceased spouse was receiving. If the higher earner delays until 70, he/she would be putting this spouse in the highest earning potential possible in the event of an early passing.
These issues are only magnified if there is a wide age difference between spouses as well. For couples who have similar benefits, these factors may not be quite as critical, but there are still strategies that can allow you to maximize benefits.
Ultimately, if your spouse would be dependent on your income and benefit selection, a delay in Social Security election is generally advised.
Summary
The flow chart below should provide you with a basic framework of when to consider collecting Social Security.
Of note, you should be considering these, and other factors when deciding which age makes the most sense for you and your family when it comes to choosing when to collect Social Security. Be sure to also check out our post that discusses how Social Security is taxed in retirement.