Collect Social Security Now or Wait?
There are several questions that you should be asking yourself if you are preparing to apply for your Social Security benefit. The largest question being, at what age should I begin collecting my Social Security? Throughout this blog I will cover the basics of Social Security, the related concerns, as well as the factors you must consider when making this decision. This is an important step in your retirement planning process since Social Security will be one of your main income sources in retirement, and the age you decide to being collecting can have a meaningful impact how much you will receive in the future.
Key Takeaways:
When is the right time to collect your Social Security check?
5 things you need to know about collecting Social Security
What does family history have to do with Social Security?
Keeping your pressure off your other assets
Should you be concerned about Social Security solvency?
When is the right time to collect your Social Security check?
The age that you can collect Social Security ranges from 62 to 70 with each year providing a different benefit amount. At age 62, your Social Security benefit will be the lowest, but you will be able to collect it the longest. To contrast, if you collect at age 70 then you will receive the largest benefit but would not be able to collect for as many years so there are other factors to consider. Your health is a good place to start since the breakeven age between your benefit at age 70 and 62 is 78 years old. This means that at age 78 the total amount received from collecting your benefit at age 70 will surpass the total amount from collecting at 62. Therefore, if you believe that you will live past age 78 then you should take your delayed benefit and significantly increase your income in retirement.
If you collect at age 62, then you will receive 70% of your primary insurance amount (PIA) which is your benefit at normal retirement age. To contrast, those who start to collect at age 70 will receive 124% of their PIA as your benefit increases by 2/3 of 1% per month after you pass your normal retirement age. If your birth year is 1960 or after, then your normal retirement age is 67. Those who were born between 1955 and 1959 have a normal retirement age between 66 and 67 so if you don’t know what age you qualify for normal retirement then you should find out. You should have received a Social Security statement in the mail, but another way to figure it out is to go to ssa.gov and log in to download your statement.
Keep in mind, that difference between your benefit at age 62 and 70 is not factoring in any cost of living adjustments that could occur in any of those years. The Social Security Administration has averaged a 2.8% cost of living adjustment since they have been offering them since the 70’s. That 2.8% would apply on top of any increase you would be getting by waiting to collect past your normal retirement age.
5 things you need to know about collecting Social Security
(1) The first thing you need to consider is if you need the money now. Those that have been consistent with their saving, could use their current income to cover their living expenses and then collect their increased Social Security benefit between ages 68-70. You don’t have to wait until 70 to collect, but I would recommend looking at your benefit for each year to understand what you are giving up by taking your benefit early. To contrast, those that are unemployed and didn’t do a great job saving for retirement may need to collect their benefit now (early) to cover their living expenses.
(2) The second thing you need to consider is if you are currently working. If you are between age 62 and your normal retirement age (66.5/67 depending on birth year) then there is a limit of how much you can earn per year while collecting Social Security. In 2022, this limit is $19,560 so if you expect your salary to exceed this amount then you should not collect your benefit before normal retirement age. Doing so would lock in a lower rate and you would not receive the full benefit in the months/years preceding your normal retirement age.
The way your Social Security amount would be calculated in the situation above is that it would be decreased by $1 for every $2 you earned over the limit. If you make $10,000 over the limit, then your Social Security would be reduced by $5,000. At that point, the earliest you would want to collect your benefit is at normal retirement age so that you could earn your salary and receive your full PIA amount each month.
If you reach full retirement age in 2022, then the limit on your earnings for the months before your full retirement age is $51,960. In this case, your Social Security benefit would be reduced by $1 for every $3 you earn over the limit. Then for the remaining months of the year, when you are normal retirement age, you can collect your full benefit no matter how much you earn. You can read more about these restrictions on ssa.gov which includes more specific examples.
(3) The next thing to consider is if you are married or not. From there you should figure out whose benefit is higher, and if collecting their benefit early would potentially negatively impact their spouse. This could happen when the higher earning spouse takes their Social Security benefit early because the surviving spouse can collect 100% of the late spouse’s benefit if the survivor has reached full retirement age. However, if the deceased spouse claimed their benefit before full retirement age, then the surviving spouse will receive a decreased amount. This would especially impact spouses that do not have many years of work experience such as a stay-at-home Mother whose Social Security benefit is not large enough to live off.
Additionally, the surviving spouse can delay their own benefit while collecting the survivor benefit. They will receive an additional 8% increase in their own benefit per year they delay collecting after full retirement age up to age 70. This allows the surviving spouse to collect the survivor benefit and increase their own benefit which they can switch over to if it surpasses the survivor benefit. Therefore, the typical strategy is for the higher earner to collect their benefit last, either at full retirement or later to make this option available.
What does family history have to do with Social Security?
(4) Another important thing to consider is your health and family history. If you are single and have poor health, then it would make sense to take your benefit early because there is potential for you to have a short collection period. However, for those that are married with poor health, the decision is not as simple. As covered above, if the higher earner collects their benefit early then it could negatively affect their spouse, but your poor health could result in a short collection period so what should you do?
It comes down to your specific situation, but I will cover a couple general scenarios where the higher-earning spouse has poor health and what I would suggest. First, if the lower-earning spouse has a benefit similar to the higher earning spouse, then I would suggest the higher earning spouse collect their benefit early. They could then collect the survivor benefit as early as age 60 and delay the collection of their own Social Security to allow it to grow larger and earn any cost of living adjustments. The survivor benefit at age 60 would be approximately 71.5% of what the deceased spouse was receiving, with an increased percentage for each year closer to full retirement age.
The other situation would involve a qualifying child, which according to SSA would include any child under age 16 or with a disability. In this instance, the survivor benefit would be 75% of what the deceased spouse was receiving, which could be collected by the survivor at any age. In this scenario, the now deceased spouse would have negatively impacted the amount the survivor receives by collecting early. Therefore, you would need to analyze both spouses Social Security benefits as well as their age difference to understand the possible scenarios. If the higher earning spouse was older or the survivor had a similar benefit, then it would make sense to collect early since the survivor could collect the benefit longer before switching to their own. While if the surviving spouse did not have much work experience, then it would be in the survivor and child’s best interest for the higher earning spouse to not take their benefit early.
People will reference family history as the longevity of your family and should be interpreted as how long your biological family members typically live. If your family members tend to pass away early, then you may want to consider taking your benefit early to increase your collection period. The opposite goes for an individual whose family members typically live a long time. In that case, you should consider delaying your benefit until age 70, as you will receive a significantly larger amount over the long-term assuming you live past the breakeven age of 78.
Social Security Analysis Example
If you are unsure of what to do, then I would recommend looking at the differences in total benefit when collecting at different ages. It is important to see what you could collect by waiting, and how much money you would give up in the long-term by collecting early. There are several Social Security calculators out there to calculate breakeven age, or how much more you receive collecting your benefit at one age rather than the other. You could always calculate these figures yourself in excel if you are savvy with finance/math. However, there are calculators that you can find online to simplify the process and assist you in making an informed decision of when to collect your Social Security benefit.
Keeping your pressure off your other assets
(5) The final thing to consider is whether you should continue working to increase your benefit. Delaying your social security benefit to normal retirement age or later can take a lot of pressure off your other income sources, mainly your investment portfolio. Since you would be collecting an increased benefit, you would not require as much income from your investment portfolio. This would allow more time for your investments to grow and give your money a greater chance of keeping pace with inflation. Relying on the stock market for all your income can be stressful since there can be major fluctuations like we saw during Covid-19.
The calculation for an individual’s Social Security benefit uses their highest 35 years of work history, and if they haven’t worked 35 years then it inputs a 0 for the missing years. Remember, those first few years of work experience were likely at a part-time or entry level position so the earnings can be assumed to be lower. To contrast, if you are near retirement age then you have a lifetime of experience and can be assumed to be making a lot more than in the beginning of your career. If you can work over 35 years and replace those low income years with higher earnings, then that would increase your Social Security benefit and benefit your retirement. Not only would you have a larger benefit, but you would also have less time in retirement putting less stress on your other income sources.
The Social Security Administration has an online calculator on ssa.gov that you can use to estimate your benefit. Using this calculator, you can determine the effect of working longer and if it makes sense for you. Make sure to have your Social Security statement handy while doing this because your yearly earnings can be found on the right side of the third page. You should first ensure that none of these figures are incorrect and then proceed to fill in the calculator. If you do find any mistakes, then you should contact Social Security (800-772-1213) right away because mistakes do happen, and it could take years to correct.
Should you be concerned about Social Security solvency?
There have been many independent studies done on the long-term solvency of Social Security and the Social Security Trust Fund. A few years ago, the estimate claimed that by 2034 only 79% of the benefits would be paid out if no compensatory actions are taken. This has been a widely covered and political issue that has worried millions of Americans. However, there are a few minor tweaks that Congress can make to ensure that Social Security will provide for generations to come.
We are lucky that we have enough people in the younger generations in the United States to pay into the system to support the older generations. There are several countries that cannot utilize a system like Social Security to support the old leaving that burden on the families themselves. Therefore, you should not collect your benefit early thinking that you want to collect what you can before Social Security dries up. I believe that if the current members of Congress are unable to solve the issue, then eventually individuals who can fix the problem will be voted in.
To conclude, it would be best to delay your Social Security at least until full retirement age when your situation allows. Although, no two families are the same, so a thorough analysis of relevant factors should be completed before any decisions are made. This would include the five important considerations listed above, as well as your investment portfolio, and current and future assets and liabilities. If you need assistance with this process, then you should contact a financial planner in your area. I offer a free retirement assessment where we could review your current situation and the actions you should consider as you prepare for retirement.
