January 25, 2010 — If your quick response to this question was 62, you might want to think a little harder. More and more information is coming out that supports the idea that you should wait as long as possible, particularly if you or your spouse had a high earning career. If you responded that you weren’t sure, that was a good answer, because the question is a surprisingly complex one and highly personal too. This article will review some of the key considerations you need to take into account before reaching your decision. Note: See our 2011 article, “10 Things You Need to Know Before You Start Taking Social Security“.
First, to recap: For people born between 1943 and 1954, your full retirement age is 66 (for people born earlier it is few months younger; or older if you were born in a later year). If you were in born in 1946 and elect to start receiving your benefits this year (2011), you will get 93.3% of the monthly benefit you would receive if you waited until age 66. If you delay taking benefits even longer (until a maximum of age 70), you will receive 8% more for each year you wait. You have the option of starting your benefits at age 62, although it will be reduced by 25% of the benefit paid at age 66. The longer you wait (up until age 70), the more you get.
We’re Living Longer
Part of the reason why so many experts advocate waiting to start your benefits has to do with our increased longevity. The average life expectancy at birth is 78; it was 63 when Social Security started. The average life expectancy (78) is the break-even point – if you live to the average age it doesn’t matter whether you started collecting your benefits early or late – the amount you get will work out to be the same. However, if you live longer, waiting to collect your benefit will net you more money. The chances are that you will live longer too, because by the time you reach 65 your life expectancy is 82 if you are a man and 85 if you are a woman. People who are married live even longer. And even if you start to collect before full retirement age and you die before your average life expectancy, you still might not have gotten ahead of Uncle Sam. That’s because if your spouse lives a long life he or she will get reduced benefits based on your early distribution decision.
Deciding when you and your spouse start taking benefits is one of the most complicated questions. That depends in part on whether either or both of you were high earners. In general, high earners should wait. In a situation where the husband was a relatively low earner, he might want to start taking benefits early and specify that the high earning spouse delay benefits. That way the higher benefits accruing to the higher earning spouse are preserved, but the couple can start getting some social security income in the door to help with living expenses. The lower earning spouse will get a step-up to 50% of their spousal benefit when the higher earning starts to collect at full retirement age, although it will be reduced somewhat because of the decision to start taking benefits early. The Schwab article in the “Further References” section below discusses the “62/70” rule.
Working = Delay
If you are working you definitely should think about delaying your benefits for several reasons. For one, if you make more than the minimum of $14,640 before you reach full retirement age, your benefits are reduced by $1 for every $2 you make over the minimum. In the year you reach your Full Retirement Age the benefit reduction is $1 for every $3 earned up to $38,880. For another reason, the longer you work the more your maximum payment will be, up to age 70. Your “primary insurance amount” (PIA) is based on your highest 35 earning years, so it is in your interest to drop off lower earning years (like those on your first job).
On the other hand, it might not make any sense to delay taking your benefits if you really need the money. Better to take a reduced benefit and stay afloat than to lose your home or not have enough to eat. If your increased benefit drives your total income over $85,000/single or $170,00/jointly you will have to pay higher Part B premiums, as Old Nassau points out.
No More “Do-Overs”
One of the best articles we have ever seen on when to take social security benefits is “How to Hike Your Social Security Benefits“, just written by Robert Powell of Wall Street Journal MarketWatch. In his article Powell points out the demise of the so-called “Do-Over” strategy. This option, which previously allowed social security recipients to start collecting early and then cancel and re-register at full retirement age, paying the earlier benefits back with no interest, has been discontinued.
Powell also has a very helpful discussion about when high and low earners should start taking their benefits, including strategies for married people.
Social Security COLA increase set for 2012
When to Start Receiving Retirement Benefits from the Social Security Administration is also extremely helpful.
Another is the Center for Retirement Research’s “Social Security Claiming Guide“.
Schwab has an excellent guide that explains some of the more complex strategies for claiming social security benefits.
2 Part Series: What You Think You Know About Social Security Might Hurt You
What do you plan to do?
As always, you should carefully research this question and consult with your accountant and/or financial advisor before making an important decision like this. Please let us know your strategies and questions for taking social security in the Comments section below.