Determining the Best Age to Start Social Security

Many baby boomers are in the home stretch toward retirement and thinking about what will be the best age for them to claim Social Security retirement benefits.  I have already written about this issue from several different angles but I thought it would make sense to pull all of that together and summarize the factors that I will considering when the time comes.                                                                       

Why the Social Security Start Age is Important

I think the quickest and easiest way to appreciate the importance of your Social Security starting age is to see it graphically.  Therefore, I have borrowed from the Social Security website this graph which represents the different benefit levels for a hypothetical retiree who would be entitled to a monthly benefit of $1000 at his or her full retirement age of 66.

As you can see, the benefit amount is reduced by 25% (approximately 7% per year) if this retiree starts benefits at age 62.  The benefit is increased by 32% (approximately 8% per year) if the start date is delayed until age 70.  (After age 70, the benefit is not increased, except for the cost of living adjustment.)   Considering that these benefit level differences are permanent, making the correct decision is critical.  

Gathering the Data

Any assessment of the Social Security start age needs to begin with gathering all of the important data. This includes your earnings history and your benefit estimate, as determined by the Social Security Administration. The most comprehensive source of this data is your printed Social Security statement that is mailed to you every year. If that is not available, a more abbreviated source of similar data can be obtained from the online benefit estimator.

It is important to remember that the benefit estimates assume that your earnings will continue at substantially the same level until you choose to retire.  This may or may not be important, depending on how many years of Social Security earnings you have in the system. Under current law, your 35 highest years of earnings are used to calculate your benefit amount.

Another important piece of information to consider is your life expectancy.  Knowing (guessing?) this can help you run different “what if” scenarios for different benefit start dates.  Fortunately, there are online life expectancy tools that can provide guidance based on your personal lifestyle and other circumstances.  Do not discount the possibility that you will live 20-30 years after you start receiving benefits.

Social Security at Age 62

This is the age at which (under current law) we are first eligible to claim benefits.  A recent survey of boomers at age 61 revealed that a full 45% planned on starting Social Security at 62.   Apparently necessity is driving some of these decisions but I would be surprised if that is all of it.  Instead, I suspect that a lot of boomers are just not thinking things through financially.  After all, by making this decision, they are surrendering 7%-8% annual raises with cost of living adjustments.

Some of these decisions may be a consequence of just being tired of working.  One option in this situation is to stop working at age 62 and delay claiming Social Security for a few years at least.  During this time, you would live off other retirement assets.  I have previously written about what happens if you use the stop and delay strategy.

Conversely, some early claimants will continue working while on Social Security.  By doing so, they will lose $1 in benefits for every $2 of earned income above $13,560.  However, this reduction in benefits can be recaptured later.

Another issue with starting at age 62 is health care. Medicare eligibility does not start until age 65. That could change if the Obama administration fast tracks plans to institute national health care. If that happens, I’m speculating that the percentage of boomers who start Social Security at age 62 will increase.

Finally, there is the issue of taxes.  If you have income in excess of $25,000 ($32,000 if filing jointly), your benefits are taxable.  The percentage of benefits that are taxable depends on a number of different factors, primarily your total income.  For example, if your other income plus 1/2 of your benefits exceeds $34,000, up to 85% of your benefits are taxable.  Ouch.  Obviously, you need to carefully consider this if you plan on working after claiming benefits at age 62. For more information on taxation of Social Security benefits, read IRS Publication 915.

Social Security at Full Retirement Age

For baby boomers, the full retirement age is 66, give or take a few months.  Three things happen by delaying until your full retirement age.  First, your benefit is substantially increased, permanently.  Second, your benefit is not reduced by having other earned income.  Third, you are now on Medicare.  All good things.

Social Security at Age 70

I have previously analyzed the reasons for delaying the Social Security start date until age 70. The reasons are purely financial and are intimately tied to how long you expect to live.  If you compare the return on investment from delaying to other investments, it’s a real eye opener.

Some people would argue that delaying creates a risk that the rules of the game will change.  I suppose that’s a possibility but unlikely.  For more of my thoughts on this, read I’m Counting on Social Security – How about You.

Impact of Spousal and Survivor Benefits

This is the area where I think a lot of pre-retirees don’t pay enough attention before deciding when to start receiving their own benefits.

A spouse is entitled to claim a “spousal” retirement benefit based on the other spouse’s benefit.  The maximum is 50% of the spouses benefit. For example, if the husband is entitled to a Social Security retirement benefit of $1000/month at full retirement age, the wife can claim a spousal benefit of $500/month.  (Of course, the wife can claim a benefit based on her own earnings, if that benefit is greater.)

To receive the full 50% spousal benefit, the wife must also wait until her full retirement age.  If instead she starts receiving the spousal benefit at age 62, the benefit is reduced to 35%, or $350 in this example.

Thus, for this hypothetical married couple of the same age, the difference between both starting Social Security at age 62 compared to full retirement age is approximately $400/month, forever.

The difference shows up again for a surviving spouse.  When one spouse dies while receiving benefits, the surviving spouse can claim 100% of the other spouses benefit.  (You can’t receive your own benefit or a spousal benefit at the same time.)  Therefore, the different benefit levels between starting at age 62 or waiting to age 70 can continue for many years, until the surviving spouse dies.  That can add up to a lot of money. The related issue is that when only one spouse is alive, the total Social Security benefits received arereduced by 50% no matter what, because the spousal benefit disappears.

Final Thoughts on Social Security Start Age

This is an issue that I am going to continue to study, right up to age 62 and beyond.  Laws could change as could my circumstances.  I will not make a quick decision. When I do make a decision, it will be based on the combined needs of me and of my wife.

Check back because I will likely update this post as I learn new information or come up with some new ideas, including some of the interesting Social Security “give back” strategies.  I would love to hear your thoughts and ideas also.

Photo credit:  Janet Powell


Comments

  1. gordon says

    Hi there…I am 66 and my wife is 62. We do not NEED social security to make ends meet, yet. We assume long lives for both…excellent health. Which option is better
    a. waiting until age 70 to begin SS for me or
    b. starting to draw now at 66, then immediately suspend my draw and claim my 1/2 sxpousal share on my wife’s account and doing that until 70 and THEN switching back to my own account?
    If you cant answer this, can you suggest a source? Thanks so much
    Gordon

    • Mr. GoTo says

      Gordon: Who will receive the largest benefit – you or your spouse – and is the difference significant?

      Also, I don’t believe you can claim and suspend your own benefit then claim a spousal benefit unless the spousal benefit is actually larger than your own suspended benefit. That’s unlikely. The SSA says that you have to take the larger benefit to which you are “entitled.” Even though you suspend the larger benefit (your own), you are still “entitled” to it. Therefore, the SSA won’t send you anything.

      To learn more about the economics of “claim and suspend” I recommend you read the research paper linked here

      • gordon says

        hi there….yes, continue studying by all means. You continue to not mention a great strategy (and you misstate the earnings limit).
        The strategy I have mentioned before and you said would not work isd called “A vs B” by the SSA. It PAYS me to wait until I am 70 to begin to draw on my account. Here’s how:
        I am 66 and my wife is 62. She earned less. She filed in July and began to receive her $776 per month. I filed at the same time AS HER SPOUSE and receive over $500 per month (1/2 of what she would have earned at 66). I will continue to receive this $500 per month until I choose to begin to draw on my own account, as late as age 70. In the meantime my potential payment grows 8% per year. I am being paid to wait.
        Get with it!! This works. I am receiving the checks!! gordon

  2. Roland says

    Starting social security benefits at age 62 could be a good strategy for people who are single and who have retired or are not earning more than $14K a year. Let’s say your full social security benefits at age 66 is $1000. If you start drawing at age 62, you will only get a reduced amount of $733. So, at age 66, you will get $267 less a month, but you will have already collected 48 months of benefits totaling $35184 (assuming no cost-of-living adjustments for simplicity’s sake). So you will be ahead for 11 years ($35184 divided by $267), or until you are 77.

    The advantages of this strategy are: (1) you’ll be ahead if due to illness or accident you don’t live to age 77 (2) you have a lump sum to invest for greater returns or simply have fun (3) social security and indeed, civilization, may not be around when you are 77 (just kidding).

    Even if you do nothing and just stash the money in your mattress, you have the option of buying an immediate “income for life” fixed annuity at age 77 with that $35184. You should more than make up for that $267 a month shortfall.

    A caveat if you are married: by law, the benefits your widow can collect cannot be greater than your benefits, so will be $267 less than had you waited until age 66 to start your benefits.

  3. Laura Sully-Shelton says

    I am 47 years old, and recieving Disability and SSI, due to illness (M.S. and chronic migraines). My husband, Larry Shelton, is 61 (will be 62 May 26th, 2011), and has been collecting unemployment for about a year, due to downsizing & layoff of his last place of employment. He wants to ‘retire’, however everything I read says 62 is the absolute youngest one can apply. Is there anything he can do NOW, in terms of starting his retirement, or must he wait until he is 62? Thank you in advance, Lauralynne Sully-Shelton.

    • Roland says

      There is no way to start your retirement benefits before age 62. To prevent any loss of benefits, your husband should file an application 3 months before he reaches age 62.

  4. Donna Jacobs says

    Hi! I am 49 and my husband is 61. I have made more money than my husband. Should he begin claiming social security at 62 and I wait until I reach my FRA? We are both in good health and both of us will continue working.

  5. Sami says

    I tried to calculate the Total amount of money one receives from social security based on different “start receiving benefits age”.
    if you start receiving money early, you end up receiving more money over the years. The reason for this is that you receive 12 lower payments for each year you start cashing social security pay earlier. This can amount to a lot of money. EX. Say At 66 you can receive $1000/month & at 68 it will be $1160. In the two years 66,67 you will receive $24,000. With the $160 / month increase it will take you over 12.5 years to make the $24,000 you received when you were 66 and 67 ! (You break even at age 68+12.5=80.5 years)
    After age 80.5 you would be better off with $160/month!

  6. larnce gardner says

    here is my dilema married for 32 years divorced for 7 years wife was awarded half of my pension in texas a retired teacher amount,$934.00 im 62 now an havent been able to find a job. For thirty years teaching schools were not deducting social security so only my summer jobs counted in which give me abenefit of $210.00 cant i draw from her befeti which is around $810,00 if she retire for amonth or so

  7. Lee Martinson says

    For a married couple, or in some cases for a divorced person, when you take into account, the survivor benefit and the tax benefits, delaying your benefit can really be a boon. Especially since it has a COLA feature as well. Many people think they can’t afford to delay, but sometimes there are other options such as a reverse mortgage. It’s not for everyone and shouldn’t be a decision made lightly but it’s worth considering. A reverse mortgage doesn’t have be be an all or nothing proposition. It’s possible to get a one time partial lump sum without pulling out all of your equity. And it doesn’t need to be paid back as long as you live in the home.

  8. Rome Johnson says

    Start, Stop, Suspend questions:
    Me by far highest earner both SSI eligible.
    Wife 5.5 yrs older.
    I would like to lay out a scenario and have you tell me if it is possible and then your opinion on pros/cons.

    Wife receives her own SSI beginning at her FRA for one yr prior to me being 62. When I begin my early benefit at age 62, she suspends her own benefit to receive spouse benefit from my elegibility for 2.5 yrs until she is 70. When she turns 70 and begins receiving her own maxxed out benefit, I am 64.5 and suspend my benefit until my FRA.

    thanks,
    Rome

  9. Rome Johnson says

    Forgot to finish the above with this last sentence:

    Then when my wife is on max benefit at age 70, I receive spouse benefit from her elegibility until my FRA.

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