One of the first things many people think about at retirement is when to start receiving Social Security benefits. For many Americans, who have little or no savings or other sources of retirement income to draw from, the obvious answer is as soon as possible.
But for others, the answers can be far from clear. When it comes to Social Security arriving at the right claiming strategy is like putting together the pieces of a lifetime puzzle that include age, marital status, lifetime earnings, life expectancy, other sources of income, savings, and taxes.
Entire books have been written about Social Security claiming strategies, so trying to cover all the bases in one short article is impossible. Still, five major facts about Social Security are good planning launch points that can help get your thinking organized and decide what to do.
Individuals can claim Social Security anytime from age 62 to age 70. If you claim at full retirement age–which varies, depending on when you were born–you get the full benefit due. Benefits are reduced for every month you claim earlier than that, and increase for each month you delay until age 70.
The extra income for waiting is significant. For example, someone who is born in 1954 and entitled to a full monthly benefit of $1,500 at age 66 would collect 75 percent of that amount, or $1,125, if she claimed at age 62. If she waited until age 70, that monthly benefit would increase to $1,980.
To complicate matters, the age for attaining the full benefit is somewhat older for those born after 1954. Those born in 1960 or later don’t achieve that milestone until age 67, so they are penalized more for claiming earlier than that.
Considering that the Social Security Administration estimates that the average woman turning age 65 today can expect to live for almost another 22 years waiting as long as possible to draw benefits by continuing to work or tapping other sources of income is generally a good idea. But for those with life-threatening illnesses and shorter life expectancies, or no other sources of income, claiming as early as possible probably makes more sense.
With two people in the mix more options open up because spousal benefits, deciding who should take benefits first, and other strategies come into play.
Most people know that spouses can choose to take an individual benefit based on their own work record, or 50 percent of their spouse’s benefit. If the first spouse claims before full retirement age the spousal benefit is based on the reduced amount.
Couples with big differences in earnings over the years, or those where one partner had little or no employment history, are often better taking the spousal benefit. Others, especially those with similar incomes, may be better off going the individual route. (To get an idea of what your benefit will be under both scenarios, use the Social Security estimator at ssa.gov.)
Another consideration is timing. In some cases, it can make sense for one spouse to claim earlier so that the other can delay as long as possible to get a bigger payout. Those born on or before January 1, 1954, can also take advantage of something called a “restricted application,” for spousal benefits. The move, which is explained well in the Society of Actuaries (SOA) booklet “Deciding When to Claim Social Security” can help couples achieve higher combined benefits over a longer period of time. For those born afterward “…it rarely makes sense for both spouses to delay their benefit until age 70,” notes the SOA. “As a rule of thumb, the older and/or higher benefit spouse will generally delay taking his or her benefit until age 70 and the other spouse may choose to claim at any time after age 62 based on other considerations.”
Several options are available to divorced individuals who were married for at least 10 years, haven’t remarried, and have an ex who qualifies for Social Security. They can claim based on the former spouse’s earnings record or their own, whichever is higher. Those collecting on an ex’s record who have reached full retirement age are eligible for half of the benefit. If you’ve remarried, check to see if you can coordinate Social Security with your current spouse.
Widows and widowers can claim based on a deceased spouse’s earnings record as early as age 60. They can later switch to obtaining benefits based on their own records, if those benefits are higher, at age 62 or later.
Younger retirees who continue working while collecting benefits could see their benefits reduced. For 2019, those under full retirement age for the entire year can earn up to $17,640 without reduced Social Security benefits. After that, benefits are reduced by $1 for every $2 over the limit. Those reductions aren’t permanent, though. Earnings restrictions disappear at full retirement age, and any benefits that have been previously forfeited are returned as higher monthly benefit payments later on.
Moderate to high-income retirees collecting benefits may also be surprised to learn that up to 85 percent of those payments are taxable at the federal level at ordinary income rates. Thirteen states also levy state taxes. The federal levy is based on what’s called the provisional income formula: modified adjusted gross income, plus tax-exempt bond interest, plus half of Social Security benefits. Taxes on benefits kick in even at relatively modest income levels. For single individuals, up to 50 percent of benefits are taxable if provisional income is over $25,000, and up to 85 percent is taxable if it’s over $34,000. This tax structure brings with it the need to employ strategies to reduce the tax bite on Social Security.
Deciding when to claim Social Security is far from an exact science. For one thing, laws change. And because a lot of strategies center around life expectancy of individuals or combined life expectancies for couples, planning can sometimes feel like a morbid guessing game. Still, given the known elements out there now devising a “best guess” strategy is better than doing nothing at all.
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