For most of the people out there, the time of their life when they start to work is also the same time they start paying Social Security taxes. At a young age, it’s difficult to imagine collecting on the program years into the future. For many, the time they can collect comes up faster than they think, and they are forced to answer the question – when do I collect? This is not a decision to take lightly since the choice you make today will affect your benefits for the rest of your life. As financial advisors, this is a question we help our clients with on a regular basis. Whether tax planning or retirement planning, both are greatly affected by one’s choice of when to collect. To delay or not to delay collecting your own benefits is the toughest question to answer – we hope this blog gives you some helpful tips on this topic.  

It’s my money, and I want it now! 

After paying into the program for decades, it’s a reasonable response to want to collect your money as soon as possible, especially with all the headlines regarding the Social Security trust fund disappearing before our eyes.1 Since there are concerns about the program lasting into the future, eligible participants believe they should collect their money while there is still money to collect or as soon as possible. Unfortunately, we, as financial advisors, are unable to predict the future, so we cannot speak with 100% certainty about the future of Social Security and if it will ever run out of money. However, we find it highly unlikely that the program will ever go away completely, and any drastic changes made to the program are more likely to affect younger workers in our economy rather than those already collecting or soon to collect. 

Although the future of Social Security may be uncertain, we can say with complete certainty that collecting Social Security early will have immediate ramifications today. The earliest age at which an individual can collect is 62 (excluding disability or a survivor’s benefit). If you decide to collect early, your benefits will be reduced for life. That’s right – this one decision will affect your payments forever. How much of a reduction on your payments will occur if this is the case, you ask? This depends on a few things – how early you collect benefits and when your full retirement age (FRA) is. If you were born in 1960 or later, your FRA is age 67, the age at which you can collect 100% of your benefits. If you were born before 1960, your FRA may be a bit sooner than your 67th birthday but still after your 66th birthday. The Social Security Administration explains it as, “a benefit is reduced by 5/9 of 1% for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12 of 1% per month.2  In simple terms, if your FRA is 66 and you take benefits at age 62, it’s a 25% lifetime reduction. If your FRA is 67 and you take it at 62, it amounts to a 30% total lifetime reduction. Both are potentially steep prices to pay over your lifetime by collecting as soon as possible.  

Good things come to those who wait… sometimes! 

If you’re penalized for taking benefits before your FRA, then it is only fair that there is an upside to delaying collection of benefits past your FRA. Like receiving benefits early, the amount of the delayed increase is on a per-month basis of 2/3 of 1% per month.3  This amounts to an annual increase of 8% in benefits per year if you delay the collection of benefits. You may be thinking, “If I don’t need the money, I could delay until I’m 80 and receive an enormous benefit.” Not so fast! The latest an individual can receive delayed retirement credits is at age 70. Therefore, there is no additional advantage to waiting past age 70. With that in mind, even if you’re still working and you don’t need the money from Social Security, it still makes sense to file to collect your benefits if you are 70 since there is no longer an upside to delaying.  

As a quick recap, here are the options for those who are trying to decide when to collect their Social Security. Once you turn 62, you can begin to collect your Social Security benefits at a reduced amount. Each month you wait past age 62 will cause an increase to your benefit until you reach 100% of your entitled benefit at your FRA if you haven’t started to collect. The other option is to wait past your FRA until the age of 70 to collect your maximum benefit amount. Each year you wait past your FRA causes an increase of 8% to your benefits. For those who have an FRA of 67, if they wait to collect benefits until they reach age 70, they will be entitled to 124% of their entitled benefit (8% x three years past their FRA).  

When should I collect? 

Now, with all this knowledge, the real question is when one should collect one’s benefits, and the truth is everyone’s situation is different, so there are no set rules to follow. In general, Social Security is incredibly complex, with many nuances, rules, and regulations. The above information just scratched the surface of the rules, and for any permanent, potentially life-altering decisions (like when to claim Social Security), you should speak with a financial advisor. However, it often makes sense to delay taking benefits until age 70 if you are in good health and don’t have minor children (see below). The reason for this is a rather large one: an 8% government-guaranteed increase per year that is adjusted for inflation for life. This isn’t something you can get anywhere else in other investment vehicles.  

Of course, with the choice to delay benefits, there is a risk you could have a sudden, unexpected death tomorrow and never see a penny of the program you spent most of your life paying into (although your surviving spouse may benefit from your delay). We find that this risk is generally much smaller than the possibility of outliving your assets. People continue to live longer each year (not necessarily a bad thing), and new medical advances are made every day. With that in mind, this means more people will need money for longer periods of time after retirement. While delaying benefits does not necessarily guarantee a comfortable retirement for years to come, it is something that can help.  

Another one of the main reasons individuals should delay their collection of benefits is for tax reasons. There are Social Security tax implications that all financial advisors should be aware of when making decisions for their clients. The threshold for paying taxes on Social Security benefits has not been adjusted for inflation since 1994, which means more and more taxpayers will continue to be hit by these tax issues as time passes. Individuals with relatively modest assets may be able to avoid this tax danger with an aggressive Roth IRA savings strategy. The goal is to avoid as much taxable income after you start collecting Social Security benefits to reduce the amount that your Social Security is taxed. Once your modified adjusted gross income is above certain limits, you will have to pay taxes on 85% of your benefits. The key to avoiding the taxation of Social Security as much as possible is to fund your Roth IRA with as much money as you can in the years leading up to collecting Social Security. The reason for this is that the money going into the Roth account will not be taxable income when it is taken out once you’re collecting Social Security. During the periods leading up to collecting, you will be drawing money from your tax-deferred accounts (traditional IRAs) and converting it into tax-free money in your Roth IRA. This means you will be increasing your adjusted gross income in the years leading up to retirement, but you will be able to stay in a lower tax bracket through retirement by drawing from these tax-free accounts.  

Regarding the decision to collect for married couples, it often makes the most sense for at least the higher earner to delay collecting until the age of 70. By doing so, the higher earner is permanently increasing their monthly benefit throughout their lifetime. In the case of the higher earner passing away first, the remaining spouse’s payments are increased to their deceased spouse’s larger payments for the rest of their life. This is known as a survivor benefit and is another important caveat to be aware of when making decisions on when to collect.   

At the end of the day, your decision on when to collect Social Security benefits is a bet on how long you think you will live. The longer you live, the greater the benefit is in delaying Social Security now. If you have an illness or condition that may limit your life expectancy and you know this ahead of time, that’s one of the occasions we find it may make sense to claim early. Other situations involve having dependents or if, in general, you simply cannot afford to wait until age 70 to collect. Some people will rely on these benefits in retirement to keep them afloat, and in this case, it makes sense to take your benefits early.  

What if I Have Minor Children? 

One of the main reasons to collect Social Security after your FRA (and sometimes earlier) is if you have minor children. Minor (unmarried) children can receive a benefit on your record until age 18 (or graduation from high school if under age 19). They may also be entitled to a benefit at any age, if they have a disability that began before age 22 (known as Social Security Disability Insurance, or SSDI).  

Your child can receive up to half of your FRA benefit. However, the total benefit paid to the family is capped, so a detailed comparison of the pros and cons should be undertaken before any decision is made.  

Whose Record Should I File On? 

In addition to the decision of when to claim Social Security, you may also need to decide on whose earnings record you are claiming. If you’re married, you have the option to claim your own or one-half of your spouse’s benefit. If you’re divorced and have not remarried, you may also claim on an ex-spouse’s record if you were married for at least 10 years and are currently entitled to benefits (at least age 62). Also, if your spouse has passed away, you can claim the higher of their record or your own, if you have not remarried before age 60. 

Let’s wrap it all up! 

Social Security is a very complicated program that many Americans do not fully understand, causing poor decisions to be made by the average American at retirement age. It is very important that people understand the benefits of delaying their collection of Social Security if they can do so.  

The government gives you the option of taking a reduced pension early (as early as 62) or an enhanced pension (as late as 70) – smaller payments for a longer time or larger payments for a shorter time. On average, the Social Security Administration’s trust fund pool is affected the same way whether an individual chooses to collect at age 62 or at age 70. On the other hand, individuals should prefer the enhanced benefit as it provides a guaranteed lifetime inflation-adjusted income (additional 8% for every year you delay). This choice will provide individuals with some protection against outliving their money. If you or someone you know is in a situation in which they don’t know what decision to make regarding collection of benefits or just need assistance with their overall financial plan, please reach out to our team! 

1 Research: The Future Financial Status of the Social Security Program (ssa.gov) 

2 Early or Late Retirement (ssa.gov) 

3 Benefits Planner: Retirement | Delayed Retirement Credits | SSA 

 

Disclaimer: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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