For many Americans, Social Security benefits represent a major portion of their retirement income. But there is a lot of confusion on when to start taking these benefits.
We recently published an article that highlights situations in which you may want to take your benefits early. You can read it here. Now, we’d like to discuss the times when waiting to claim your Social Security benefits until later can make more sense.
First, it’s important to review the basics:
To be eligible for benefits, you must earn at least 40 credits. You earn up to four credits a year (you’ll need to earn $5,880 to get all four credits), so eligibility will require a minimum of 10 years of work in which you paid Social Security taxes. The amount you will receive depends on your lifetime earnings and the age when you file your claim for benefits.
You can claim your Social Security benefits starting at age 62, but the amount you’ll receive increases for each year you postpone claiming benefits, up to age 70. Your full retirement age is 66 or 67, depending on your birth date. The amount you receive by claiming your benefits at your full retirement age is called your Primary Insurance Amount, or PIA. You are eligible for a “reduced PIA” if you claim before reaching your full retirement age.
With monthly payments as high as $3,895 for someone filing at age 70, it’s important to understand the tradeoffs of waiting and claiming. While it’s tempting to claim early on, as a Registered Social Security Analyst with the National Association of Registered Social Security Analysts, and a Certified Financial Planner in Greenville, SC, there are 3 reasons why it might pay to wait.
If you are married, you have the opportunity to coordinate your benefits with those of your spouse. Doing so can help you obtain the maximum amount of money from Social Security.
The strategy of staggering claims at different ages is called “restricted application,” in which both spouses claim one spouse’s earning record until the second spouse is ready to replace their spousal benefits by filing a claim on his or her own earning record. This strategy can be especially beneficial when a younger spouse has a lower earnings record.
Here’s an example of how it works:
Let’s suppose Mary is 62 and her husband John is 66. Mary’s PIA is $1,000/month, which she would receive if she waited to file her claim until she reached 66, her full retirement age. John has just reached his full retirement age and his PIA is $2,496, which he could claim immediately.
They decide instead to pursue the restricted application strategy. Mary files her claim now, earning her a reduced PIA of $750/month. Because John has already reached his full retirement age, he can file a restricted application for spousal benefits (based on Mary’s earnings record) of $500/month. By doing so, the couple collects $1,250 per month while allowing John to postpone filing until age 70, at which time he’ll be eligible for $3,295/month.
In other words, John’s monthly benefit increased by 32 percent because he waited four years (from age 66 to age 70) to file a claim based on his own earnings record. Between ages 66 and 70, he collects $500/month based on Mary’s earnings.
This couple will also be entitled to annual cost-of-living adjustments after they file their claims. This should help them keep up with inflation.
You may be able to afford to postpone claiming your Social Security benefits if you continue to work past age 62. By living on your work earnings, you let your benefit grow each year you delay filing your claim.
The Bureau of Labor Statistics estimates that, by 2024, 13 million Americans aged 65 or older will be working. The number of workers in this age group is expected to have the fastest rate of increase over any other group. If you continue to work in your 60s, you’re in wide company.
The Coronavirus pandemic has also caused people to work longer than initially expected. Check out our new guide: Financial Planning Post-COVID-19.
There is a tradeoff between filing earlier versus later. When you file early, you earn less each month, but you earn it over more months. Waiting to file allows you to earn more per month, but you’ll do so over fewer months.
One important wrinkle is that, until you reach your full retirement age, up to 85 percent of your Social Security benefits will be withheld if you continue to work. You’ll receive the withheld money once you reach your full retirement age.
Bear in mind that you lock in your annual benefit when you file your claim (except for annual cost-of-living adjustments). If you expect to live longer than previous generations did, you may want to postpone your claim to help ensure the money you do collect will be enough to live on throughout the remainder of your life. (Read our recent blog post: How Long Will Your Retirement Be? A Longevity Calculator.)
If your full retirement age is 67 (i.e., you were born in 1960 or later), your benefit will be reduced by 30 percent if you file your claim at age 62. For each year you delay filing past your full retirement age, your benefit will climb by 8 percent. Because of these variables, it’s helpful to perform a “breakeven analysis” to see the best age in which to file a claim.
Your Social Security “breakeven age” is the age at which the total of the lower benefits from early filing is equal the total amount you would have collected if you had waited to file later on.
For example, “Bob” was born in 1960 and his full retirement age is 67. He will reach age 62 in 2022, and if he files his claim then, his PIA will be reduced at 30 percent. In his case, his monthly benefit would be reduced to $700 from $1,000 had he waited until his full retirement age of 67.
“Chuck” is Bob’s twin brother and has a similar earnings history. However, Chuck decides to delay his claim until age 67, at which point he’ll earn $1,000/month.
For the first five years starting at age 62, Bob collects $42,000, while Chuck collects nothing. At age 67, Chuck files his claim and collects $3,600/year more than Bob does. Breakeven analysis tells us when Chuck will catch up with Bob. In this particular case, the solution is that it will take 11.67 years (they will be 78 years and 8 months old).
Talk with the financial advisors at Global View about your options concerning claiming or waiting for your Social Security benefits. As a Registered Social Security Analyst with the National Association of Registered Social Security Analysts, and a Certified Financial Planner in the Carolinas, we can help work out your various breakeven scenarios and help you determine the optimal age at which to file your claim based upon your life expectancy.