On August 14, 1935, President Franklin D. Roosevelt signed a piece of paper that would change the way Americans viewed and funded retirement. That hot, late-summer day in our nation’s capital led to the dawn of a program that has survived now for nearly 85 years. While there have been amendments and changes along the way, Social Security is an important agent for many current and future retirees.
Social Security impacts nearly 63 million Americans and amounts to about 40% of income for retirees. The significance of Social Security leads it to play an important role in people’s financial wellbeing throughout retirement.
Each person’s Social Security benefit differs based on their work record and the age when they enroll in their benefits (down to the month). Deciding when to claim benefits is a hot button topic on the minds of many pre-retirees as it has a permanent impact on your retirement income.
But it is important to know Social Security is not a one-size-fits-all type of program. The time in which you choose to enroll in your benefits should be a holistic conversation where you take into account your working habits, your job satisfaction, marital status, health factors, income need, as well as your lifestyle needs and requirements.
Today, we are going to look at three of the most common times to enroll in Social Security. Each option will have its own benefits and drawbacks, but at the end of the day, it is important that you make the choice that will honor yourself, your loved ones, and your goals in retirement.
The basics of your benefits
In order to be eligible for Social Security, you will need to earn at least 40 work credits throughout your career. Those credits are based on a specific amount of money that you earn. For 2020, you will get one credit for every $1,410 you receive.
Your Social Security benefits are based on your 35 highest-earning years. There is a maximum benefit that you can receive due to the income threshold for Social Security payroll taxes. In order to be eligible for the maximum benefit, you would have to earn the maximum amount of income subject to payroll taxes for those 35 years. According to the Social Security Administration the maximum benefits for 2020 are as follows:
- $3,790 per month for those filing at age 70
- $3,011 per month for those filing at full retirement age
- $2,265 per month for those filing at age 62
Now that you have an understanding of how your benefits will be calculated, it is time to look at the different strategies you have for enrolling in those benefits.
The early bird: collecting at 62
The earliest time you can enroll in Social Security is age 62, unless you claim under a widow’s benefit which allows you to collect at 60. This is also the most common time for people to enroll in their benefits. The reason it is so popular is that you are able to collect your money earlier which can provide many benefits for supplementing income or funding other retirement goals such as traveling, downsizing, hobbies, charitable efforts, and more.
But, by choosing to enroll early, you will be permanently reducing your monthly benefit by as much as 30% each month over the course of your retirement. Let’s take a look at an example.
Dave’s full retirement age is 67 and his corresponding benefit would be $1,750 per month. By choosing to enroll at age 62, 60 months earlier, Dave’s overall benefit will be reduced by the maximum of 30% leaving his monthly checks to $1,225. This reduction in benefits could hinder Dave’s overall retirement income, especially if he lives a long life.
Before collecting early, it is important to take a look at your working situation. If you are still working while collecting Social Security, there is an earnings limit to bear in mind. If exceeded, all or some of your benefits could be temporarily stalled. Take a look at the earnings threshold to see where you fall.
While enrolling at 62 will reduce your benefits, it still might be the best course of action for you. Take some time to evaluate your income need, potential spousal benefits, and your health to see if enrolling early will enhance rather than detract your retirement lifestyle.
Perfect timing: collecting “on-time”
The next time that people enroll in Social Security is at their full retirement age, which differs depending on the year you were born. For those born 1960 or later, your full retirement age is 67. By enrolling at your full retirement age, you are eligible for 100% of your benefit based on your work record for the rest of your life.
Remember Dave from our example above? By waiting until he turns 67, Dave will receive his full $1,750 per month for the rest of his life. Waiting until full retirement age is an excellent choice for many people as it gives them access to their full benefit without having to wait too long to start collecting.
Better late than never: collecting at 70
Much of the financial advice out there urges retirees to wait until they turn 70 to start collecting Social Security. Why? Because delayed retirement credits could boost your monthly check by about 24%. This increase could prove beneficial to healthy retirees with a long life expectancy as they can count on a much larger check month to month. 70 is really the latest time that you should enroll in benefits as that is when your delayed retirement credits stop accruing value. You aren’t obligated to take them, but there is no additional financial incentive to wait.
By delaying benefits until 70, Dave would be eligible for a monthly benefit of about $2,275 per month.
While this may help some retirees, delaying benefits isn’t always the best option. Make sure you assess your other streams of income and cash flow to determine if delaying benefits will help maximize your retirement lifestyle in the long run.
Social Security & You
At the end of the day, Social Security was designed to help retirees supplement their income in retirement. As it was envisioned by President Roosevelt and others before him, Social Security was an opportunity to give back to people who have paid into the system their entire working lives.
Deciding when to enroll in your benefits is an important piece of your retirement planning strategy. Your decision should take into account your personal finances, health needs, spouse, and retirement goals. The goal for Social Security should be to maximize your benefit to help you live the retirement you want and deserve.
Here at TFS, it is our goal to help you plan for the retirement you have always wanted and your financial security is a big part of that. Understanding the basics of Social Security can give you a better idea of what strategy makes the most sense for you and your family. We would love to help you create a strategy to maximize your benefit. Get in touch with us today. We can’t wait to speak with you.