Collecting Your Social Security Benefits: Timing Matters!
Written by Fiona Gu
It is extremely crucial for you to understand the importance of when to collect your Social Security benefit. Your benefit amount would be reduced by five-ninths of 1% each month if you collect within 36 months before your full retirement age. However, your benefit would be decreased by five-twelfths of 1% each month if you start collecting more than 36 months before your full retirement age. According to the Old Age, Survivors and Disability Insurance Monthly Statistics, although everyone knows it is much better to wait, still over two-thirds of workers take social security early.
Factors to Consider
Cash Needs: If you have enough financial assets, such as investments, traditional pensions, and other sources of income, you can consider early retirement because the date to start your social security benefit is flexible for you. However, if you have difficulty living without collecting your social security benefit early, then DO NOT consider early retirement. Work until your full retirement age, or even longer (if possible).
Life Expectancy and Break-Even Age: If you start to take your social security benefit early, you would have more monthly checks than if you start later. However, the amount on the checks would be greater if you begin your social security benefit later. So when is this break even age? The break even age depends on your benefit amount, the assumptions associated with taxes, and the opportunity cost for waiting.
For example, if you are turning 62 years old this year, and your monthly benefit at age 62 and one month is $1795, age 66 is $2434, and age 70 is $3263. Your break even ages would be the following:
62 versus 66 (full retirement age) – Break even age ranges from 76 to 77.
62 versus 70 – Break even age ranges from 78 to 79.
66 versus 70 – Break even age ranges from 80 to 81.
In this case, as long as you live until 77 years old, you would come out ahead when you collect social security benefit at age 66, instead of 62. The longer you wait, the older the break eve age is. The graph below from Charles Schwab illustrates some break even points.
Your life expectancy can affect your decision of when to start collecting your social security benefit. In theory, if you have an average life expectancy, it does not matter when you start. If you have a longer life expectancy than average, the best method is to wait until a later date and receive large monthly checks. If you have a shorter life expectancy than average, the best method may be to obtain as much as possible while you are still able to.
Spouse: You should think about your spouse’s health especially if you are the higher-income spouse. However, if you are the spouse who hasn’t earned much throughout your career, your survivor benefit would depend on the higher-earning or the deceased spouse. If the lower earning spouse files for social security benefit at age 62, and the higher earning spouse has already filed for social security benefit at their full retirement age, then the lower earning spouse could collect 50% of the higher earning spouse’s social security benefit. However, since the lower earning spouse filed for social security before their full retirement age, the 50% would be reduced. More information can be found on the Social Security Spousal Benefits.
There is a specific strategy called the 62/70 split. This is when the lower earning spouse begins to collect social security benefit at age 62, but the higher earning spouse waits until age 70. Before the higher earning spouse starts to take social security benefit, the lower spouse’s benefit would depend on their own working record. Once the higher earning spouse files for benefit at age 70, the lower earning spouse’s benefit can be bumped up.
Another strategy is to have the higher earning spouse collect benefits based on the lower earning spouse’s record at the full retirement age. Once the higher earning spouse reaches age 70, they should switch to have their benefit based on their own record. This way, if the higher earning spouse dies first, the lower earning spouse’s survivor benefit would be greater. If the higher earning spouse does not die, then the lower earning spouse can use the spousal benefit based on the higher earning spouse’s record.
Note:All these extra benefit could still be reduced by early filing percentage.
Employment Status: If you apply for social security benefit before your full retirement age, $1 in benefit would be decreased for every $2 you make above $14160 (the annual limit in 2010). If you apply for social security benefit in the year you are about to reach the full retirement age, $1 in benefit would be reduced for every $3 you make above $37680 (the annual limit in 2010). Your benefits would stop being reduced starting from the month of your full retirement age. Keep in mind that your benefit could be taxable (depending on your modified adjusted gross income). For more information, please see article Taxes on Social Security Benefit.
Note:You should always delay filing for social security benefit until your full retirement age. However, please do not file any later than age 70.
Other Retirement Plans: If you can obtain a higher rate of return on a tax-deferred retirement plan than your social security benefit, taking your social security benefit early may be a suitable option. However, some experts believe it is not good to allow your retirement account to build up, because it could generate higher taxes. If both your retirement account and social security account makes you earn higher than the annual limit, you would have to pay taxes for your social security benefit. Pushing back the date of obtaining your social security benefit could reduce taxes for you by allowing you to make more social security income (at most 85% taxable) and less retirement-account income (100% taxable).
The chart below summarizes the factors you should consider when deciding when to take social security benefit.
Consider taking benefits earlier if...
Consider waiting to take benefits if...
You are not working and have difficulty surviving financially without your social security benefit.
You are working and have enough income to affect your benefit’s taxability. Wait (at least) until your full retirement age so benefits are not lowered due to earnings.
Your health is poor and have a life expectancy that is shorter than average.
Your health is great and have a life expectancy longer than average.
You are the lower earning spouse and your higher earning spouse can wait to apply for greater benefit.
You are the higher earning spouse and want your surviving spouse to take the greatest amount of benefit possible.
It is extremely crucial for you to understand the importance of when to collect your Social Security benefit. Your benefit amount would be reduced by five-ninths of 1% each month if you collect within 36 months before your full retirement age. However, your benefit would be decreased by five-twelfths of 1% each month if you start collecting more than 36 months before your full retirement age. According to the Old Age, Survivors and Disability Insurance Monthly Statistics, although everyone knows it is much better to wait, still over two-thirds of workers take social security early. 
