Deciding When to Take Social Security Retirement Benefits
Those who live long enough, face the big question: “When should I start taking my Social Security Retirement Benefits?” Like most of the big questions in life, there is no one, simple answer. Whether you take your retirement benefits at age 62, at 67 or 70 will depend on your own individual work and financial situation. There are pros and cons to each option, and we will discuss them here.
What is Full Retirement Age?
Until a few years ago, full retirement age for everyone was age 65. That is no longer the case. Now, full retirement age depends on the year of your birth. If you were born in 1950, or earlier, you are already at full retirement age. After 1950, full retirement age begins to climb:
Year you were born Your full retirement age
1951-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and after 67
Should I Take My Social Security Retirement at Age 62?
The earliest you are eligible for Social Security Retirement is age 62. If you are considering taking early retirement benefits, you need to be aware of the two big negatives to that decision: (1) Your lifetime benefits will be significantly reduced; and (2) there will be strict limits on the amount of money you can earn for the next several years.
Both the websites for the Social Security Administration and AARP have links that will allow you to calculate your benefits, including the percentage reduction for early retirement. The government calculates your full retirement benefit based on the 35 years with your highest reported earnings. Other factors like military service may also come into play. If your full retirement age is 66, and if you choose to retire earlier, you can expect your benefits to be reduced by five-ninths of 1% for each month you collect early benefits, up to 36 months. If you retire more than 36 months early, your benefits will be decreased by five-ninths of 1% per month for the first 36 months and further reduced by five-twelfths of 1% per month for the additional months.
If you think this is confusing, join the club. A few examples may serve to clear things up. First, let’s assume you retired on your 62nd birthday which fell on May 15, 2017. That means you were born in 1955, and your full retirement age is 66 years. By retiring on your 62nd birthday, you received benefits at 75% of your full retirement amount. The reduction amounts to 25% (36 months reduced by 5/9 of 1% per month, and 12 months reduced by 5/12 of 1%). Your decision to take benefits early means that your benefits will remain at 75% of full value for the duration of your lifetime.
Let’s assume you were born March 31, 1954. You decide to retire at the end of the year when you are 64 years, 9 months in age. Your full retirement age is 66, which means you are retiring 15 months early. The reduction in benefits would be 5/9 of 1% x 15 months or 8.3%. Once again, the reduction is permanent.
The other drawback to early benefits is earnings limitations. Under the law, a person collecting Social Security Retirement before full retirement age is limited in the amount of money he or she is permitted to earn through employment. For 2018, the maximum you will be allowed to earn, without penalty, is $16,920.00 for the year. If you earn more than $16,920, $1 in benefits will be deducted for every $2 above the annual limit you earn. Of course, once you reach full retirement age, the limit no longer applies, and you can continue to work with no reduction in benefits for higher earnings.
Waiting to Take Benefits until Full Retirement Age or Delaying to Age 70
If you wait until full retirement age to take Social Security Retirement, you will collect your full calculated benefit. If you delay even further, your monthly benefit will continue to increase until age 70. If your age for full retirement is 66, delaying to age 70 will provide you with a monthly benefit of 132% of your full retirement benefit.
What happens if you take your retirement benefit at age 62, receive benefits for a year, and then get a good job offer that entices you back to work? Does the law allow you to change your mind? The answer is yes. You would be required to contact the Social Security Administration, arrange to pay back the benefits you’ve, already received, and go back to work. However, you may only use the repayment and return to work option for one year’s benefits. The Social Security website has more detailed information on this issue at www.ssa.gov/planners/retire/withdrawal.html.
Strategies for Making the Right Decision
Who should take benefits at age 62? Of course, many people don’t have much choice in the matter. Poor health and inability to find a job can force the decision. People who take their benefits at age 62 may receive less money each month, but they will receive more Social Security checks over their lifetime. If your full retirement age is 66, and you start taking Social Security when you turn 62, you will reach your break even point somewhere between age 77 and 78. In other words, once you are 78 years old, those people sharing your birthday who delayed taking benefits until age 66 will have caught up with you in the total dollar amount they have received in benefits. If the other person waits until he is 70 to take his benefits, you will be 81 years old before he catches up in the dollar amount paid out.
If you have adequate resources like a traditional pension, a healthy 401k, or other sources of income, you can base your choice on when to take benefits on health and lifestyle. Couples may want to strategize when each takes benefits. If you are married with one spouse earning a significantly higher income than the other, you may want to consider having the lower earning spouse take benefits at age 62. If the higher earning spouse continues to work, the other spouse’s benefits will be based on his or her own earnings. However, if the higher earning spouse has already retired, the lower earning spouse can take benefits at age 62 in an amount equal to 35% of the higher earner’s benefit. For example: Jack earned 150,000 per year in his job as a CPA. Last year, Jack retired at age 66. Jack’s wife, Sue, is turning 62 this year. During their marriage she worked in a friend’s flower shop, earning minimum wage. Based on their relative wage histories, the couple’s best option is to have Sue retire at age 62. That allows her to collect 35% of her husband’s Social Security Retirement, which is considerably more than her own benefit would be. If Sue retires at 62, and Jack continues to work, her retirement would be based on her own wage history, rather than Jack’s.
If you are healthy and employed, you may want to consider delaying retirement. Working until full retirement age or beyond to 70 will boost your monthly benefit. Higher wages in the last few years of employment can push you closer to the maximum allowable benefit. Consider your assets, your family health history, your interests, and your current health. All these factors play into your decision on when to take benefits. Do not take benefits early based on an unfounded fear that Social Security Retirement will evaporate in the near future. The 2017 Annual Social Security Trustees Report projects that the Social Security Trust Fund has sufficient assets to pay out benefits at the current level until at least 2035. There may be changes made in the future to help preserve and strengthen the Trust. We all need to do our part to make sure the right decisions are made in Congress to preserve this critical system for future generations.
Resources
www.aarp.org/work/social-security/social-security-benefits-calculator.html
www.ssa.gov/news/press/factsheets/colafacts2018.pdf
www.ssa.gov/pubs/EN-05-10147.pdf
