When Should I Take My Social Security Benefit?

October 30, 2018

One of the biggest sources of income for non-government retirees is their Social Security benefit. For the average retiree, Social Security accounts for 40% of their retirement income.
This leads to a potentially life-changing question: when should I begin taking my Social Security benefit?

Let’s do a quick summary of important information:

  • The benefit, called the Primary Insurance Amount (PIA), is calculated using an average of the highest 35 years of your lifetime earnings.
  • You can begin receiving your individual retirement benefit as early as age 62, but you will receive the smallest possible benefit. At 62 you will receive 75% of your PIA, and all future benefits are calculated from this amount.
  • The most important age when discussing Social Security is the Full Retirement Age (FRA). At Full Retirement Age, you receive 100% of your PIA. If you were born between 1943 and 1954, your FRA is age 66. From 1955-1959, FRA is age 66 and an additional two months for each year of birth after 1955. If you are born after 1960, your FRA is age 67.
  • If you have earned income of more than $17,040 in 2018, and you took your benefits before FRA, they will be reduced further. For every two dollars in earned income over $17,040, your benefit is reduced by one dollar. This ‘earnings limitation’ of $17,040 is removed at FRA or later.
  • If you wait to receive benefits after FRA, the amount increases by an average of 8.00% every year until age 70.

Example: Let’s assume your PIA is a $1,000 per year at FRA (age 66). Refer to the first table. It assumes zero cost of living increases. Table two assumes a 1% COLA:

What I’ve touched on, in a simplistic way, is the concept of Social Security Optimization. On the surface, it may seem simple; I’ll wait until 70 so I get the most money. A benefit equal to 132% of your FRA seems pretty tempting, but I would recommend that you take a more practical approach to the concept.

Think about the following:

  • Life expectancy. In the above charts, to truly optimize your benefit, you must collect the Age 70 benefit for at least 12 years. Unless you have a properly functioning crystal ball, this could be risky.
  • If you are under age 70, retired, and decided to delay your benefit, you must pay for all living expenses using other sources (i.e. pension and investments). This can put a strain on your resources.
  • Another factor is the rising cost of medical coverage. Not only do you have to pay for this with your resources, if you are under age 65, you must buy unsubsidized medical coverage. Example: On the healthcare.gov site, a married couple (both age 62) making $45,000 per year will pay $13,620 per year for medical coverage.
  • Let’s not forget about inflation. Inflation is near historical lows right now, but many external factors, especially rising interest rates, can cause inflation to creep up. This will impact things like groceries, gasoline, clothing, etc. This reduces your purchasing power at a time when you have limited resources.
  • Draining the pool. Maybe you think that the fact that a smaller workforce supporting the funding mechanism of the benefit is a bit disconcerting. If that’s true, why would you wait?

Luckily there is something that you can get that includes an optimization, and an analysis that includes all these items, and more: a financial plan.

If you are looking to make a more thoughtful decision, the best place to begin is with a plan. A financial plan helps you make sense of your entire financial picture, especially retirement income planning. You can even request a scenario where your benefit shrinks or disappears entirely (if that’s a concern). By engaging a financial planner, you are working with someone who is trained to put the pieces of your financial puzzle together into one big picture; all they ask is that you give them the information to do their job.

Creating a financial plan that is specific to your financial circumstances and includes Social Security optimization allows you to make the most informed decision possible when it comes to your benefits.

Reach out today to learn more.

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