When Should You File for Retirement Benefits?
One of the most common questions regarding Social Security is, “When should I begin taking my benefits?” Like most financial planning questions, the answer is always, “It depends on your situation.” When it comes to deciding when to start receiving benefits, the two most important considerations are the need for income and longevity.
Deciding When to Claim Your Social Security Benefits
There are dozens of online tools to help you determine the best time to file for Social Security, but many of these calculators require you to input your life expectancy. It is difficult to know how long you can expect to live. The need for income is much easier to determine.
If you expect to live a long time, the results will almost always skew toward delaying benefits for as long as possible because this will result in a larger cumulative lifetime benefit. If you are in poor health or your family history suggests you may not live long into your golden years, it will recommend taking benefits much earlier.
For a high wage earner, the point in time when you would achieve a greater overall benefit by waiting until full retirement age (FRA) instead of filing early for the smaller benefit amount is typically in your late 70s. If it seems reasonable that you will live beyond that point, it is best to wait until FRA.
Similarly, comparing taking benefits at FRA versus waiting for the maximum benefit at age 70, the point in time when you would achieve a greater overall benefit by waiting is your early-to-mid 80s. So if you expect to live a longer life, waiting until age 70 will result in a higher cumulative benefit from Social Security.
Delaying Often Makes Financial Sense
If you wait beyond FRA to receive delayed retirement credits, you will receive a guaranteed 8% increase for each year you wait up to age 70. If you’re married, this increased benefit will roll over to your spouse as a survivor benefit when you pass away. In addition, pushing your benefits out will allow you to avoid paying taxes on them for those few years. The tax thresholds for Social Security benefits are low, and most of us would prefer paying as little tax as necessary, especially if you can make do without the additional income.
Taking Benefits Early
For many people, Social Security is the biggest retirement asset they have. While it may be ideal for most people to wait for a higher benefit, not everyone can afford to wait. If you need the income at age 62, you will have to accept a reduced benefit. If you do not have an immediate income need when you become eligible, waiting beyond FRA to receive delayed retirement credits has several benefits.
Other people want to collect their Social Security benefits as early as possible because they’ve paid into the system their entire career and they’re ready to reap the rewards. However, it’s critical to understand the consequences of filing early and how it can reduce not only the benefit you receive but also any spousal and survivor benefits. (For more from this author, see: The Pitfalls of Claiming Social Security Early.)
Changes to Claiming Strategies
Some Social Security strategies were altered with the Bipartisan Budget Act of 2015. The goal of this legislation was to close some “loopholes” and make the filing process more streamlined.
The most generous was the file and suspend strategy. This applied to married couples who were both eligible for retirement benefits based on their individual working records. Using this approach, upon reaching FRA, each spouse would suspend their retirement benefit and simultaneously file for spousal benefits, allowing them to receive 50% of their spouse’s benefit while their own retirement benefit continued to grow. At age 70, they would roll over to their now maxed-out benefit. This was a very fruitful strategy for those who knew about it, but it was permanently eliminated in April, 2016.
The most notable remaining strategy is the restricted spousal application. This is for married couples who each qualify for retirement benefits. To be eligible to this approach, you must have been born in 1953 or earlier. As with all spousal benefits, one spouse must currently be receiving their Social Security benefit for this strategy to work. (For related reading, see: Helping Couples Strategize for Social Security.)
Restricted Spousal Application Illustration
John and Mary are married. Both were born in 1952 and qualify for $2,000 per month from Social Security. At FRA, John files for his benefit but Mary wants to wait. With John actively receiving $2,000 per month, Mary suspends her own benefit and files the restricted spousal application. In doing so, she receives $1,000 per month (50% of John’s benefit) and begins accumulating DRC credits on her own benefit. At age 70, Mary will be eligible to receive $2,640 per month (32% increase on her original $2,000 per month benefit).
The restricted spousal application can be a powerful strategy for those who meet the requirements. As time goes by, fewer and fewer people will be able to use this approach.
Social Security is very complex, and the decision on when to take this benefit can have a huge impact on your retirement outcome. It’s important to consider a variety of factors including both your physical health and your financial health. There are a lot of uncertainties when it comes to retirement, but how and when you take your Social Security benefit is one of the few areas where you have a lot of control. Armed with the right information, you can make the best decision for you and your family.
(For more from this author, see: Social Security Retirement Benefits Basics.)
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