Social Security is a critical program for many retirees and beyond, which is why it’s so important to get right. We love talking about Social Security and helping our clients make informed educated decisions concerning their benefits.
It serves as a guaranteed income source and is an essential agent for income planning in retirement, set to replace about 40% of your pre-retirement funds. The significance of Social Security leads it to play an indispensable role in people’s financial wellbeing throughout retirement.
But it also serves several other purposes, from disability benefits to survivor benefits, impacting over 69 million Americans.
Even for all its significance, this program doesn’t always get painted in the most flattering light. There are important concerns that Social Security will run out of money if not amended. The Social Security Administration (SSA) itself even estimates that benefits will likely stay on track until 2037, but after that, the program could face new challenges.
In many ways, Social Security is still similar to the original law President Roosevelt signed over 86 years ago. His vision altered the way Americans viewed and funded retirement. But in other ways, the program has expanded and shifted to serve an array of people and still plays a critical role in retirement planning.
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 crucial 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, job satisfaction, marital status, health factors, income need, and lifestyle needs and requirements.
Today, we will 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, you must make the choice that will honor yourself, your loved ones, and your goals in retirement.
The Basics of Your Benefits
First things first: understanding how the program is funded.
Social Security gets its funding primarily from payroll tax, 12.6% split equally between employers and employees up to $142,800 in earnings. Self-employed workers pay the entire bill, but half is deducible come tax time.
One myth about Social Security is that you take out what you put in, but that’s not the case. Current contributions fund present beneficiaries and so on.
To be eligible for Social Security, you need to earn at least 40 work credits throughout your career. Those credits are based on a specific amount of money you earn. According to the SSA, for 2021, you get one credit for every $1,470 you receive up to a maximum of four credits per year.
Accumulating work credits makes you eligible for the program, but work credits don’t determine your benefit (neither do personal contributions throughout your career).
Your Social Security benefits are based on your 35 highest-earning years. Your earnings don’t have to be consecutive or stop when you turn a certain age—you can work and earn as long as you’d like!
But if you don’t have 35 years’ worth of earnings, the SSA inputs a “0” in the formula, which can significantly reduce your total benefit. This stipulation can impact women who may have taken time away from work to raise a family or care for a relative, making Social Security planning for women even more vital. It’s also why even just a couple of extra working years can have such a dramatic impact on your total benefit.
The SSA calculates a maximum benefit each year, depending on the income threshold for Social Security payroll taxes. 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 2021 are as follows:
- $3,895 per month for those filing at age 70
- $3,113 per month for those filing at full retirement age
- $2,324 per month for those filing at age 62
Do you want to get a better idea of what your benefits might look like? Head on over to your my social security account, and you’ll have access to calculators that can help give you a better idea. If you’re really into math and want to do the calculations by hand, here’s a guide to help you do that.
Now that you understand how the SSA calculates your benefits, it is time to look at the different strategies for enrolling in those benefits.
The Early Bird: What Happens If You Collect at 62?
Traditionally, the earliest time you can begin collecting your Social Security benefits is at age 62, and as such, it tends to be the most popular time to enroll. Several instances allow you to circumvent this rule, like if you’re collecting disability benefits, are or caring for a qualified minor child, or seeking out survivor benefits.
It’s easy to see the draw for collecting early. You have quicker access to the money, 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 throughout 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.
If you change your mind about your decision to collect early, you can withdraw your benefits within the first 12 months of collecting. Keep in mind that you would have to pay back any benefits you already collected in full, and you can only make this decision once.
Before collecting early, it is critical to take a look at your working situation. If you are still working while collecting Social Security before full retirement age, you have to bear in mind the earnings limit. If exceeded, all or some of your benefits could be temporarily stalled.
In 2021, if you collect benefits before full retirement age, the SSA withholds $1 for every $2 earned above $18,960. While you will eventually get the money back, it’s periodically added to your benefit checks when you reach full retirement age, so it could take several years to recoup all the money.
Enrolling at 62 will reduce your benefits, but it may still be the best course of action for you. Perhaps you need the money to fund an immediate goal like opening a business or buying a retirement house. You may also want to collect early if you’re in or expect to be in ill health. Using the money while you’re healthy enough to enjoy it can be more rewarding. Collecting early may also be part of a larger strategy between spouses; it all depends on your unique situation.
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: The Benefits of Collecting “On-Time”
If you bypass collecting at 62, enrolling at your full retirement age (FRA) is the next most common time. Your FRA differs depending on the year you were born. Take a look at the SSA chart to find yours. For those born in 1960 or later, your FRA 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. Keep in mind that by collecting even a month before your FRA, your benefits will be reduced.
Remember Dave from our example above? By waiting to collect until he turns 67, Dave will receive his entire $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 waiting too long to start collecting.
The Later, The Better, Sometimes: Collecting Benefits at 70
For those looking to maximize their Social Security benefits fully, consider waiting to collect until 70. Much of the financial advice out there urges retirees to wait until they turn 70 to start collecting Social Security. Why? Because of delayed retirement credits.
Every month that you delay collecting benefits after your full retirement age, you accumulate delayed retirement credits. According to the SSA, even waiting just one year can increase your benefits by as much as 8%. For those with an FRA at 67, that is a possible 24% boost to your monthly checks.
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. Can you wait beyond 70? Not really. Delayed retirement credits stop accruing value, so there is no financial incentive to wait longer.
Let’s return to the Dave example. By delaying benefits until 70, Dave would be eligible for a monthly benefit of about $2,275 per month, $525 more than at full retirement age. You’ll want to work with your advisor to determine your “break-even” age or when you’ll see a return by waiting to collect.
Delaying benefits can also be helpful when considering spousal and survivor benefits. Maximizing the higher-earners benefit can be instrumental when one spouse passes away.
While delaying benefits may help some retirees, it isn’t always the best option. Make sure you assess your other income and cash flow streams to determine if delaying benefits will help maximize your retirement lifestyle in the long run.
Create A Social Security Plan That Fits Your Retirement Needs
As you’re starting to see, the best time to collect your Social Security benefit isn’t as simple as choosing A, B, or C. Several factors should influence your decision, like your income needs, present and future health, spouse and other dependents, and your broader retirement goals.
With Social Security slated to replace about 40% of your pre-retirement income, you want to make a comprehensive plan that works for you and your household both now and in the future.
That’s where a comprehensive and tailored financial plan comes into play. Creating a holistic financial plan that encompasses your goals and values sets the tone for your financial decisions and habits moving forward.
It’s our joy to help you use your money in ways that enhance your life, and your financial security is a big part of that. Understanding your options for Social Security can give you a better idea of the strategy that will make the most sense for you and your family. We would love to help you create a plan to maximize your benefit. Get in touch with us today. We can’t wait to speak with you.
Remember to check out our upcoming webinar for more Social Security best practices you won’t want to miss!