31 May When should I take Social Security?

Q. How can I decide when to take Social Security?
— Retiring soon

A. For most Americans, Social Security is a major source of their retirement income. Deciding when to start collecting is a big decision and could have a long term impact.

The age at which you can start receiving Social Security benefits can range from as early as 62 — it can be earlier, but only if you are a survivor or on disability — to age 70, said Lisa McKnight, a certified financial planner with Lassus Wherley in New Providence.

She said full retirement age is when you are eligible to receive full retirement benefits. The full retirement age used to be 65 for everyone, but under current law, if you were born in 1938 or later, your full retirement age is now some point after age 65, and as late as age 67 for those born after 1959.

The decision of whether to delay Social Security is a trade-off. You’d give up benefits now in exchange for higher payments in the future.

“Choosing to receive your Social Security benefits at age 62 could mean a reduction of benefits of up to 30 percent compared to what you would receive at your fill retirement age,” McKnight said. “On the flip side, if you delay benefits to age 70 it could mean an increase in benefits by as much as 32 percent over what you would receive at full retirement age.”

McKnight said benefits increase by up to 8 percent for every year that claiming is delayed, and this is often looked at as a guaranteed return. So a deferred claiming strategy, if possible, increases guaranteed income and provides longevity protection.

Also, in the case of a married couple, if one spouse delays claiming to age 70, a surviving spouse receives the larger of the two Social Security benefits, further emphasizing Social Security’s role in protecting lifetime income, she said.

If you feel that it will be difficult to wait, you’re not alone.

“Even though most people would probably be better off delaying benefits, more than two-thirds of eligible workers take Social Security early,” she said. ” Taking the money early might seem attractive, but it also means settling for a lower monthly payment for the rest of your life.”

McKnight said you should consider the following factors as you decide when to take Social Security:

Your cash needs:

If you’re contemplating early retirement and you have sufficient resources (adequate investments, a traditional pension, other sources of income), you can be flexible about when to take Social Security benefits. McKnight said. However, if you’ll need your Social Security benefits to make ends meet, you may want to consider postponing retirement until you reach your full retirement age — or even longer so that you can maximize your benefits.

Your life expectancy and break-even period:

McKnight said taking Social Security early reduces your benefits, but it also means you’ll receive monthly checks for a longer time. On the other hand, taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.

“If the higher payments are received for enough years (break-even period) you can more than recover the foregone benefits early on, even after adjusting for inflation and the time value of money,” she said.

In theory, she said, it shouldn’t matter when you start to receive your checks provided you have an average life expectancy. However, if you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be a good deal.

But if you’re in poor health or have reason to believe you won’t beat the average life expectancy, you might decide to take what you can while you can.

At age 65, more than 50 percent of women can expect to live past age 88, and 50 percent of men can expect to live past age 85, so delaying Social Security can provide effective income protection over the long term, she said.
The Social Security website has several useful calculators to help you estimate your own benefits, break-even period, and more.

Your spouse:

Don’t forget to take your spouse’s age and health into account as you consider when to begin receiving Social Security, particularly if you’re the higher-earning spouse, McKnight said.

“The amount of survivor benefits for a spouse who hasn’t earned much during his or her working years could depend on the deceased, higher-earning spouse’s benefit — the bigger the higher-earning spouse’s benefit, the better for the surviving spouse,” she said.

Whether you’re still working:

Earning a wage or even self-employment income could reduce your benefit temporarily if you take Social Security early, McKnight said.

She offered this example: If you’re still working and you haven’t reached your full retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit ($15,720 in 2016). In the year you reach your full retirement age, it changes to $1 in benefits deducted for every $3 you earn above a higher limit ($41,880 in 2016), deducted only for income earned before the month you reach your full retirement age. Starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn. Keep in mind that any reduction in benefits due to the earnings test is only temporary, similar to a withholding. You will get the money back in the form of a higher benefit at full retirement age, so you shouldn’t cut back on working or worry about earning too much.

Your tax situation:

Social Security benefits may be taxable depending on your modified adjusted gross income (MAGI).

As your MAGI increases above a certain threshold — from earning a paycheck, for instance — more of your benefit is subject to income tax, up to a maximum of 85 percent.

“If you’re still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit,” McKnight said. “However, in no case should you postpone benefits past age 70. You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.”

Also realize that what you see on your Social Security statement isn’t what you actually get.

“Besides the potential for taxes to eat into your benefit, your Medicare Part B (and Part D, if applicable) premium will also be deducted from the gross amount,” McKnight said.

So in summary, consider taking benefits earlier if:
• You are no longer working and cannot make ends meet without your benefits.
• You are in poor health and do not expect to make it to average life expectancy.
• You are the lower-earning spouse and your higher-earning spouse can wait to file for a higher benefit.

Consider waiting to take benefits if:
• You are still working and make enough to impact the taxability of your benefits. At least wait until your normal retirement age so benefits are not further reduced due to earnings.
• You are the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit.
• You have sufficient resources to meet your cash flow needs.

McKnight said if you have not done so already, it is very important to visit the Social Security Administration (SSA) website and create your account. Anyone who is 18 or older can sign up for a Social Security account. To do so you must provide a Social Security number, mailing address and a valid e-mail address. You also must be able to answer questions that only you are likely to know that matches the information on file with Social Security as well as your credit report.

“In addition to estimated retirement benefits, your personalized statement includes estimates of how much you could collect if you became disabled before retirement age or how much your spouse could collect in survivor benefits following your death,” she said. “Equally important, the statement provides you with a complete earnings history, which is the basis for future Social Security benefits.”

She recommends you check your statement each year for accuracy.

“The bottom line is if you have a choice and are in good health, it’s probably best to wait as long as you can to take your benefits — but no later than age 70,” McKnight said. “There are many factors to consider, and deciding when to take Social Security can be complex. Get some help from your financial planner or tax professional if you need it.”

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This post was first published in May 2016.