When to Start Taking Social Security

When to Start Taking Social Security
Eileen St. Pierre, The Everyday Financial Planner

We’ve all been told to save as much as we can for retirement, but then we have to figure out how to withdraw the money in retirement. The math can be confusing and let’s not forget all those IRS rules. Even choosing when to start taking Social Security can be a difficult decision. Here’s a little guidance to help you make that decision.

The Basics

To be eligible for Social Security (SS) benefits, you need to have accumulated 40 credits. You earn credits by working and paying SS taxes. You get 1 credit for each quarter (3 months) of work. So you need to have worked for at least 10 years. They do not need to be consecutive years.

In addition to how much you have earned over your lifetime, your benefit amount will be affected by when you decide to retire. To be eligible for full SS benefits, you need to wait until your full (or normal) retirement age. This will depend on when you were born:

  • Age 66: Born 1943-1954
  • Age 66 + 2 months: Born 1955
  • Age 66 + 4 months: Born 1956
  • Age 66 + 6 months: Born 1957
  • Age 66 + 8 months: Born 1958
  • Age 66 + 10 months: Born 1959
  • Age 67: Born 1960 and later

[Note: Even though the full retirement age is no longer 65, you should sign up for Medicare three months before your 65th birthday at www.ssa.gov.]

Retiring Early

Once you have qualified for SS, you can retire as early as age 62. However, you will receive a reduced benefit for the rest of your life. If you choose to collect SS as soon as you turn 62, your benefit reduction will be between 25% (for those born in 1943-1954) and 30% (those born in 1960 or later).

Here’s an example:

  • Your full retirement age is 66, entitling you to a benefit of $2,000 per month.
  • You decide to retire at age 62.
  • Your monthly benefit will fall 25% to $1,500 for the rest of your life.
  • A break-even analysis shows that if you live past age 77, you would have been better off waiting until your full retirement age to start receiving benefits.

Here’s something else to worry about. Once you reach your full retirement age, you can work as much as you want and it will not affect your benefits. However, if you retire early and continue to work, your benefits may be reduced. The amount of reduction depends on how much you earn:

  • If you are under your full retirement age all year, you’ll lose $1 in benefits for every $2 earned above $15,120 (2013).
  • In the year you reach your full retirement age, you’ll lose $1 in benefits for every $3 earned above $40,800 (2013).

Boy, this sounds confusing. What I basically tell people is if you plan on working past age 62, don’t start drawing SS until you at least reach your full retirement age.

Retiring Later

The longer you work, the larger your SS benefit. Your lifetime earnings will continue to grow. In addition, SS rewards you for waiting. Your benefit will increase by an extra 8% for each year you wait until age 70. Many people do not find it advantageous to delay taking SS beyond age 70. Since Required Minimum Distributions from IRAs and workplace retirement plans start at age 70 ½, this makes sense.

Let’s continue our example:

  • Your full retirement age is 66, entitling you to a benefit of $2,000 per month.
  • You decide to wait to retire until age 70.
  • Your monthly benefit will increase by 32% to $2,640 for the rest of your life.
  • It will take until age 80 to breakeven with benefits begun early at age 62.
  • It will take until age 82 to breakeven with benefits begun at age 66.

Ideally, you would like the decision of when to retire to be yours. But as the saying goes, life happens. This decision may change based on events in your life, good and bad. It’s worth taking the time to think about it.

Visit my Retirement Planning and Financial Planning for Later in Life pages for more information.