In the 85 years since the Social Security Act established a new means for Americans to prepare for life after their working days, the retirement landscape has changed significantly. There has been a dramatic reduction in defined-benefit pension plans and a migration toward defined-contribution plans like the 401(k). Life expectancies are longer and the full retirement age has crept higher.
These changes have forced most Americans to take a more active role in managing their retirement finances, including Social Security. The decisions you make regarding the benefits that you have accrued in the Social Security system are an important part of managing your overall retirement savings.
How You Qualify for Social Security Benefits
You have spent a lifetime paying into the Social Security system, earning “credits” toward the financial benefits that will become available to you in retirement. Most individuals with wage income have been paying a payroll tax (currently 6.2% on the first $137,700 of earnings) that is matched by their employer.
But as you approach retirement age, there are different options to consider when to actually begin claiming your benefits. It is important to fully understand all the strategies available in order to maximize your benefit amount.
How to Calculate Social Security Benefits
The amount of your Social Security benefit is determined by a combination of your age and your earning history. The government takes the average of your top 35 years of income up to age 60, then indexes those years to factor in inflation.
You may begin taking early benefits at a reduced rate beginning at age 62 and you qualify to receive the maximum benefit at full retirement age (FRA). Your FRA is determined by the year in which you were born.
The Social Security Administration provides a useful online tool to help individuals determine what their monthly benefit will be based on various retirement dates. It is customized based on your wage history and is available at
Claiming Benefits Prior to FRA
According to the Social Security Administration, 70% of retirees began drawing benefits before their full retirement age.
While this approach may be appropriate for some, it will likely represent a significant reduction in benefits over time for many others. Depending on your FRA, your benefits will be 20 to 30% less than if you had waited to reach normal retirement age. The following example shows how the monthly benefit increases if you delay the start date. This example assumes a $1,000 benefit at FRA.
Note that waiting to begin receiving benefits until after your FRA adds what the SSA calls “Delayed Retirement Credits” until the age of 70. These credits amount to .67% per month past your FRA.
Factors to Consider When Timing Your Social Security Benefits
In answering the question of when to begin receiving Social Security benefits, there is no universal or blanket response. Choosing the appropriate time to begin receiving benefits is a personal decision, based on multiple factors:
- Current cash needs: Are you able to meet basic family needs without tapping your benefits? Some individuals who do not have other retirement assets may be forced into an early withdrawal. Keep in mind though, that every year that you can wait to begin receiving benefits, will effectively give you an 8% “pay hike.”
- What is the life expectancy in years for you and your spouse? How would you describe your current health? If your family has a history of living well into their 80s and 90s, waiting as long as possible to tap your benefits is the obvious choice. Consider that for all Americans that are 65 years old today, one in three will live to at least 90 years old.
- Married couples: The most important consideration for spouses relates to delaying the initiation of benefits as long as possible for the higher wage earner. This gives both a higher monthly benefit for the primary bread-winner and also maximizes the surviving spouse lifetime benefit. Taking the benefit before FRA for the higher wage earner exposes the spouse to a longevity risk where the monthly benefit is permanently lower.
How Employment May Impact Social Security Benefits
Once you reach FRA, you can work and earn an unlimited amount without impacting your benefits. If you have begun taking benefits at an earlier age though, there is a threshold of $18,240 in earned income above which benefits will be reduced. However, you do not lose the benefits, they are simply deferred until you reach normal retirement age.
Gary Wagner is Principal and Chief Operations Officer at Carnegie Investment Counsel. He also works directly with clients to provide investment and strategic wealth management advice. Gary sits on Carnegie’s Investment Committee and also manages the firm’s strategic initiatives and operations.
*Information provided is accurate as of the date of this publication.
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