“The age you claim Social Security affects your lifetime income.”
Social Security Administration (SSA) payments are based on a calculation of a 35-year average of your lifetime earnings. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the highest 35 years will be used. If you worked fewer than 35 years, SSA will average in zeros for the missing years.
When to collect benefits
According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62.
Yet, according to many financial advisers, baby boomers would be better off waiting until their seventieth (70th) birthday to start claiming Social Security, than if they take benefits in their 60s.
The logic behind this advice is driven by the 8% government-guaranteed increase in lifetime payments for each year baby boomers delay benefits past age 62, up to age 70.
But, baby boomers need to ask themselves what is the likelihood they will live long enough to benefit from the increased payments that start later in life at seventy years old versus collecting benefits at sixty-two years old.
When you decide to delay starting Social Security benefits, you’re betting that you will out-live an actuarially based mortality estimate.
Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA) study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age. It provides that analysis over a range of discount rates.
A general conclusion of the study is that you shouldn’t wait to reach the age of 70 to initiate your Social Security benefits.
Social Security Benefit Breakeven
Before you start drawing on Social Security at age 62, it is recommended that you determine if it maximizes your total payments by calculating the breakeven. Additionally, it’s important that you balance the timing of those benefits with the rest of your retirement income plans. This choice of starting benefits isn’t reversible after 12 months.
Social Security breakeven age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).
- Example: If you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.
https://youtu.be/9e3M3kM9LFk
Early Benefits
Collecting early benefits may pay off despite the reduced monthly check. Since it is impossible to predict how long a baby boomer will live. If you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate.
Just be aware that you will receive a reduced benefit. If your full retirement age is 67 and you begin collecting Social Security at age 62, for example, your benefits are reduced by about 30 percent.
The rational advisors often hear from baby boomers who want to apply for Social Security early benefits at age 62 is that you’ve paid into the system for decades, and want to get something out of it before it goes bankrupt. It might feel like the best decision at the time, but down the road, it may prove the worst decision you ever made in your life.
The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had from social security, but rather that you will outlive your money. Think about waiting to collect Social Security as a form of longevity insurance—for you for sure, but also for your surviving spouse if you are the higher earner. In fact, a higher Social Security benefit is the best deal on longevity insurance you can get.
Benefits reduced if you’re work while receiving benefits
Working after you start receiving retirement benefits may affect your monthly benefit amount, depending on your age and how much you earn. If you are younger than your full retirement age, and your earnings exceed certain dollar amounts, some of your monthly benefit may be withheld.
Social Security will increase your monthly benefit after you reach full retirement age to account for the months of withheld benefits. When you reach your full retirement age, you can work and earn as much as you want and your benefit will not be affected.
Full Retirement Age
Optimum strategy for most baby boomers may or may not be to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.
Your full retirement age (FRA) is determined by the year you were born. The retirement age used to be 65 for everyone, but is gradually increasing to 67. As the full retirement age goes up, benefits claimed at earlier ages go down.
FRA is 67 for those born in 1960 or later. If you were born in 1937 or earlier, your full retirement age is 65. The FRA rises two months every year after that until it caps out at age 67.
However, collecting Social Security early will cost you. If your full retirement age is 67, your Social Security benefit is reduced by:
- About 30 percent if you start collecting at 62.
- About 25 percent if you start collecting at 63.
- About 20 percent if you start collecting at 64.
- About 13.3 percent if you start collecting at 65.
- About 6.7 percent if you start collecting at 66.
If you expect to live beyond the breakeven age, it would be financially worth your while to delay drawing benefits. Yet, there’s not an age that’s appropriate for everyone. Baby boomers must consider their own financial need, health and post-retirement plans before deciding when to begin social security benefits.
There are many ways to collect Social Security benefits. You can collect benefits starting at age 62 or anytime up until you’re 70. Collecting early benefits at age 62 means smaller monthly payouts than waiting until full retirement age or waiting until seventy (70). It’s generally advisable to wait until full retirement age to start collecting Social Security benefits because the monthly benefit is higher than starting early benefits at age 62.
References:
- https://crr.bc.edu
- https://www.thestreet.com/retirement/social-security-claim-now-or-wait
- https://www.bankrate.com/retirement/when-to-take-social-security/
- https://www.forbes.com/sites/jlange/2018/10/01/what-is-the-best-age-to-apply-for-social-security/#97e7e9a56d2b
- https://www.ssa.gov/benefits/retirement/