“The question isn’t at what age I want to retire, it’s at what income.”- George Forman
For many of you, Social Security is a very important part of the income that you will receive
during retirement, and the process of collecting benefits sounds relatively easy. Hit your
retirement age, file for benefits, and start receiving income. Unfortunately, it is not as simple as it looks and one of the most important retirement questions that you must answer is: when is the best time to file in order to maximize your benefits?
There are many different factors that go into this decision, and the answer is not as black and
white as you would think. Your goal is to choose the timeframe that will give you the most
expected income over your lifetime. For this post, I am going to keep my comments relatively general.
Here are a few questions to ask yourself:
Do I know my full retirement age?
This is the age at which you receive the full amount of your social security
benefit. Your full retirement age is determined by your birth year, and it's the
age at which the Social Security Administration deems you eligible to receive
100% of your monthly benefit.
What is my Breakeven Age?
This is probably the hardest question to answer because there's no concrete
answer that applies to everyone. Your claiming decision will be based on your
financial situation, and whether you have a spouse and/or child to care for. A
simple breakeven age calculation can help you determine when you sould claim
your Social Security benefits, and your breakeven age is the age at which your
total lifetime benefit would be the same, regardless of which age you began
taking benefits. You can use the Social Security Administration’s calculator to
help determine your benefit amount. For most people, the breakeven age is
somewhere between 77 and 83.
How is your health and your family history of longevity?
Interestingly, when I ask this question in meetings, many clients (especially men),
are very pessimistic about their future health and longevity. I often hear, “I
definitely won’t live that long!” Statistics often will prove the naysayers wrong.
Your health and how long you live can play a huge role in determining when to
take your benefits. Obviously, the longer you live, the greater the chance you have
to breakeven on receiving your benefits if you decide to wait. If you have health
issues or a family history of poor health, it might make more sense to take your
benefits early.
Who was the higher earner, who is older, and are you married or single?
Social security alone is confusing for people. Now add in spousal benefits, and it
gets even more complicated. I have seen couples who made the decision
individually and have cost themselves thousands of dollars in additional benefits
by not understanding how spouses can receive Social Security.
Spousal income benefits, as well as age discrepancies, can often lead to greater
benefits than receiving your own benefits. If you are divorced and were married ten years or more, you can often qualify for your ex’s benefits if certain criteria are met.
Do you need the income now?
The answer seems obvious, but you would be surprised at how often emotion
plays a role in this decision. There are always media reports that Social Security
will go bankrupt, and often clients want to claim benefits because they are afraid
that social security won’t be around forever. I don’t think that you should worry,
but with future generations, that might not be the case. There are some
projections that benefits could likely be cut by 2035* if legislation is not
introduced to increase revenue.
If you do not need the income immediately, it can pay to wait! Every year that
you defer your benefits, your payout will have grown by approximately 8% per
year until you reach full retirement age. This 8% annual accrual begins once you
turn 62, and it ends once you turn 70. If you have other tax-efficient sources of
income, take those first and wait to claim.
I hope these questions provide a starting point for those of you making this very important
decision. If this is something you don’t want to tackle alone, work with a professional who
can help give you clarity and direction.
Arthur Strauss, CFP®
Financial Advisor
*Social Security Office, Vol.70, No.3, 2010
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Investment advice offered through Strauss Financial Group, Inc., a Registered Investment Advisor.
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