ADVICE - When to Start Social Security Benefits

When to Start Social Security Benefits

By Robert Skladany

Background
With some exceptions, American workers and their employers contribute FICA taxes throughout their working life. Eligible workers qualify for Social Security Retirement Income monthly benefits that continue to death or as survivor benefits to spouse and qualified dependents. Each Social Security eligible person can elect to start their monthly benefit payments as early as age 62 and as late as age 70.

Starting benefits before “full retirement age” (age 66 for people born in 1943 and as low as age 65 for older individuals) results in a reduction or discounting of monthly benefits. Starting benefits later than full retirement age result in monthly benefits being increased for each year of delay, up to age 70.

The ability to elect when to begin retirement income benefits requires that every eligible person decide – and it can make a big difference in your monthly payment. There is no simple rule of thumb to help you decide when to start benefits. Many personal factors must be considered.

What Happens to Your Monthly Benefit?
Actual monthly Social Security benefits are based on each worker’s earning history, standard life expectancy assumptions and the age at which you start receiving benefits. Simply stated, start early and receive reduced benefits, start later and receive higher payments.

For every year before full retirement age, there is a about a 7% reduction, so start at age 62 and receive 25% less than if you start at age 66 – but you will collect benefits longer. For every year after full retirement, there is an 8% increase in monthly payments, so start at age 70 and receive 32% more than if you start at age 66 but forgo payments for several years. So if we use an estimated full retirement monthly benefit of $1,000 at age 66, you would receive $750 monthly at age 62 and $1,320 monthly at age 70, or almost twice the monthly payment if taken at 62.

Just the Facts Please
Let’s list the major factors that affect your decision and their influence on the “right” answer for you.

Cash Requirements - At the extreme, you’re 62, unemployed and broke with few prospects to find a good job. Your health is poor and possibly declining. Let’s not overanalyze this. You probably want to start reduced early retirement benefits at age 62. All other things being considered, your need for cash will probably trump all other considerations.

If immediate cash needs are not so extreme, and you are in reasonably good health, you may want to delay benefits. For low income older people and people unable to work due to disability, there are other protection plans such as Supplemental Security Income (SSI); and public welfare plans including Temporary Assistance for Needy Families (TANF).

Continue to Work – If you plan on continuing to work, depending on your earnings, you may want to delay monthly benefit payments.

Your early retirement benefits will be reduced or “offset” if your earnings exceed allowed limits (adjusted annually). If younger than full retirement age, your benefits will be reduced by $1 for every $2 your earned income exceeds $14,160. In the year you reach full retirement age, your benefit will be reduced by $1 for every $3 your earned income exceeds $37,680. There is no reduction in benefits, regardless of your income level, once you reach full retirement age.

Benefit reductions or offsets are not all negative. If benefits are reduced because earned income exceeds the Social Security limits, your benefits will be adjusted upward at full retirement age to reflect your offsets.

If you plan on working beyond age 62, you may want to delay receiving benefits if your other sources of income are sufficient for living expenses and obligations.

Your Health – This is a major factor! If you’re in poor health and not feeling lucky about a really long life span, you should think about starting reduced early benefits. It’s sort of a “win-win” deal. If you don’t live to a ripe old age, at least you collected some benefits. If you enjoy a long life, especially past age 76 or so, your total lifetime benefit will be pretty good.

If you’re in good health and expect a long life (and can afford to wait), you might benefit from waiting to full retirement age or beyond. Your long life span, combined with “premium” monthly benefits, yields the greatest total lifetime payments. “Great”, you say, but “How do I know for sure?” Sorry, no crystal ball here but you can estimate your life expectancy which is a very important piece of your decision. Go online and search for “life expectancy calculator.” AARP has an excellent calculator (http://longevitycalculator.aarp.org/).

Retirement Income Sources – If you are one of the fortunate people who are eligible for a traditional employer pension plan (called defined benefit pensions), or you have accumulated meaningful financial assets in IRAs or employer sponsored savings plans (401k or 403b), you may be able to delay Social Security benefits.

Unfortunately as recent financial and economic events show, employers are freezing or cancelling traditional pension plans and in some cases, eliminating employer contributions to savings plans. To make matters worse, financial markets have erased about 30% to 45% of the value in savings and investment accounts. You may want to be very conservative in estimating the future value of your retirement income from pensions and savings plans – some economists are estimating it will take 3 to 5 years for investments to simply recover the value lost in 2008.

On the plus side, your Social Security benefit is adjusted each year for cost of living. The 2009 increase was a whopping 5.8% - the biggest since 1982! There will be no cost of living adjustment for 2010 because the Cost-of-Living Index did not go up. Congress is considering a $250, one-time payment to Social Security recipients for 2010.If you take reduced early benefits, the future increases are applied to your reduced amount. Over time, this will really take a chunk out of total lifetime benefits.

Investment Income – Do you have other sources of income related to personal assets such as rental income, dividends and gains on stock holdings? If investment income is a significant portion of your future financial picture, you may prefer to delay Social Security as long as possible. Again, be very conservative about the value and income from personal assets – look what has happened to home values and home equity. For that matter, have you been planning on tapping your home equity for retirement income? You may want to reconsider how reliable the equity amount could be.

Financial Needs and Obligations – Many of us have accumulated far more debt than our parents and grandparents. We also may still have children in school with the prospect of tuition exceeding $20,000, $30,000 and even $40,000 annually. Many grandparents find themselves raising grandchildren as well. Consider the major financial obligations in your future. If you can delay Social Security benefits, hold out for higher benefits later.

Your Family (Particularly Your Spouse) – Regardless of your health and life expectancy, you have to consider the family left behind when you die. Generally, Social Security benefits are based on the eligible spouse with the higher earnings history and therefore, higher benefit. If you take reduced early benefits, your surviving spouse’s benefits will continue to be reduced until their death. If you expect that your spouse will outlive you, it might be best to delay benefits until full retirement age or later to maximize payments to them.

So, What Do People Actually Do?
The majority of people (about 55%) start benefits at age 62. Another 20% start at age 63 to 65 and the final 25% start at full retirement age. When those age 62 are asked why they are starting, most simply say, “The sooner I start, the more I’ll collect”. Others justify the decision to start with reduced benefits on the justification that “I could die tomorrow.” It is also not unusual to hear people say, “I had better collect now before Social Security runs out of money and cuts benefits”.

Unfortunately, the decision of when to start benefits is not so simple. The truth is that many people appear not to have made a well-informed decision. The reality is that many people will live pretty long. On average, you’ll live to about age 75 to 80. One out of every four 65-year-olds will live to 90 and one out of ten will live past 95. That’s a long time to be receiving reduced benefits. Would you rather scrimp and save at age 62 to 66 when you can also continue to work, or find yourself in a financial bind at age 75 to 85, or older?

How Do I Make a Good Decision?
First recognize that this is a BIG decision! Social Security benefits represent about 70% of the total income for people age 65+. Unless you fall into the category of people who simply need the income and have no choice but to begin benefits at 62, the decision as to when to start Social Security benefits requires thorough analysis.

The best answer begins with understanding your personal financial situation. Regrettably, the large majority of people contemplating or already in retirement have never done a thorough evaluation of their finances. The Social Security Administration is a valuable source for assessing your estimated benefits. Refer to their Retirement Benefit Planner for online calculators as well a wealth of other information.

Social Security benefits are only one part of your retirement financial planning. Your personal assets, returns on your savings and investments, forecasted family budget, and expected financial obligations are only several factors you will have to evaluate on your own. If you have a trusted and competent advisor who is knowledgeable in retirement financial planning and investment planning, get their opinion.

Robert Skladany is Vice President of Research & Certification at RetirementJobs.com. He has focused his career on the issues of mature and retired workers and the particular value they bring to the workplace and to employers in search of stable, productive and positive employees.