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
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