As you approach retirement age, it’s essential to understand the complexities of Social Security benefits and how they can impact your financial security. With the highest monthly benefit amount being at $4800, it’s crucial to make informed decisions about when to start receiving benefits.
Based on my 17 years of experience in the financial services industry, I have seen clients take most of the options discussed below. In this article, I hope to break down the basics of Social Security benefits, explore the factors to consider when deciding when to start receiving benefits, and provide examples to help you make an informed decision.
Understanding Social Security Benefits
Social Security benefits are designed to provide a financial safety net for retirees, disabled workers, and the survivors of deceased workers. The program is funded through payroll taxes, and the benefits are based on an individual’s earnings history. The amount of your benefit is determined by your 35 highest-earning years, adjusted for inflation.
Types of Social Security Benefits
There are several types of Social Security benefits, including:
Retirement Benefits: These benefits are available to workers who have reached full retirement age, which varies depending on their birth year but is usually age 66 or 67.
Disability Benefits: These benefits are available to workers who have become disabled and are unable to work.
Survivor Benefits: These benefits are available to the survivors of deceased workers.
Spousal Benefits: These benefits are available to the spouses of retired or disabled workers.
Factors to Consider When Deciding When to Start Receiving Benefits
Age: You can start receiving Social Security benefits as early as age 62, but the amount you receive will be reduced. The full retirement age, which varies depending on your birth year, is the age at which you can receive your full benefit amount. If you delay receiving benefits until age 70, your benefit amount will increase.
Health: If you’re in poor health, you may want to consider starting benefits earlier to ensure you receive a steady income stream. On the other hand, if you’re in good health, you may want to delay benefits to increase your monthly amount.
Financial Needs: If you’re struggling to make ends meet, you may need to start receiving benefits earlier to supplement your income. If you have a comfortable nest egg, you may be able to delay benefits and increase your monthly amount.
Spousal Benefits: If you’re married, you may be eligible for spousal benefits, which can increase your overall benefit amount.
Inflation: Inflation can erode the purchasing power of your benefits over time. If you delay benefits, you’ll receive a higher monthly amount, which can help keep pace with inflation.
Here Are A Couple Of Examples Using The Maximum Benefit
Example 1: Jake is born in 1960 and has a full retirement age of 67. He starts receiving benefits at age 62 and receives a monthly benefit of $2710. If he delays benefits until age 67, his monthly benefit will increase to $3822.
Example 2: Sally is born in 1955 and has a full retirement age of 66. She starts receiving benefits at age 62 and receives a monthly benefit of $2710. If she delays benefits until age 70, her monthly benefit would increase to $4873.
This shows that the longer you wait the higher your benefit could be.
Tips For Making A Good Decision On Social Security
Consider Your Overall Financial Situation: Think about your overall financial situation, including your income, expenses, investments and savings when making your decision.
A financial advisor can help you look at your personal situation and decide what the best strategy can be for you while considering your unique situation. I have an article on what to look for in a financial advisor. You can read it here.
Use Online Calculators: The Social Security Administration offers online calculators that can help you estimate your benefit amount based on your earnings history. I have linked the information from the SSA website here for you. You can also setup or login to your account that will show you your specific benefit details Social Security website.
Tax Implications: Social Security benefits can be taxable, and the amount you receive may impact your tax liability. Consider consulting with a tax professional to understand the tax implications of starting benefits at different ages and your specific monthly benefit.
Taking Your Benefit Early: Be careful and understand how your social security benefits may be impacted if you start before your Full Retirement Age.
If you are still working and under the age of your full retirement age, your benefits amount may be reduced or eliminated. Please see the social security article on how work impacts your benefits.
Delayed Benefit Credits: If you delay benefits passed your full retirement age, your monthly amount will increase, the amount of the increase can really add up as it is 8% increase each year till age 70.
Divorced Spouses: If you’re 62, unmarried, and divorced from someone receiving Social Security benefits, you may be eligible for benefits based on their record if you were married for 10+ years.
However, if you’ve remarried, you can only collect benefits if your later marriage ended by annulment, divorce, or death. Additionally, if you’re eligible for benefits on your own record, you’ll receive the higher of the two benefits, but not both.
Government Pensions and Windfall Penalties: The Windfall Elimination Provision (WEP) is a Social Security rule that reduces the benefits of certain government employees and their spouses who are eligible for Social Security benefits based on their own work record.
It’s meant to prevent people from getting too much money from Social Security if they also have a government pension. This can be complicated to understand and to know how it will impact your benefit if this applies so I would suggest looking at this publication explaining in more detail.
Conclusion
Deciding when to start receiving Social Security benefits is a complex decision that requires careful consideration of several factors. By understanding the factors that impact your benefit amount and considering your individual circumstances, you can make an informed decision that maximizes your social security in retirement. Remember to consult with a financial advisor, use online calculators, and consider your overall financial situation when making your decision.
