Deciding when to take Social Security benefits is one of the most important decisions one will make for retirement. You may either base the decision strictly on monetary benefits, or your decision may be more personally based.
The important question is when to start taking benefits, at age 62 or postponing benefits until age 66, or even later. The answer is different for everyone, as it depends on various factors such as health, lifestyle, and marital status.
The amount of your monthly benefit depends on two variables, when you elect to start receiving them, and how much you’ve earned during your working years. Interestingly enough, how many years you’ve contributed to Social Security can’t be changed, yet the option as to when you start taking the actual benefit payments is all up to you.
To determine how much you’ve earned, the Social Security Administration adds up the income subject to Social Security tax adjusted for inflation during your 35 highest-earning years. It then divides that total by 420, the number of months in 35 years. This figure arrives at your average indexed monthly earnings. The higher this is, the higher your benefits will be.
The Social Security Administration designs the benefit formula based on an average, so the same amount of lifetime benefits is calculated irrespective of when you begin receiving payments. The U.S. Government Accountability Office (GAO) explains this in a report on social security retirement saying “the Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim”.
When it comes to deciding as to what age to start taking benefit payments, various strategies and philosophies come into play. The calculated benefit amount per the Social Security Administration is known as the “full benefit”, in essence providing 100% of the calculated benefit due.
The caveat is that you need to be at least 66 years of age to take the full benefit amount. For workers retiring in 2014, the full retirement age is currently 66. However, if you elect to receive them earlier, then your monthly benefit is reduced for each month short of your 66th birthday. If you begin receiving them at age 62 for example, then your benefit will be reduced by 25%.
Conversely, if you wait until turning 70, then you’re entitled to delayed retirement credits, which increase your benefits by 8% for each year of deferment, capping out at a total of 32%.
So how do you determine the optimal age to take benefits and whether or not waiting may be worthwhile? A break-even analysis can be done, thus calculating how much more in benefits you may get, either by waiting for a higher benefit say age 70, or taking a lower benefit at a younger age such as 62.
Essentially, if you decide to wait, then you lose out on payments you could have been receiving since age 62. If you wait, yes the benefit payment will be higher, but you may end up receiving less overall benefit payments if you die sooner than expected.
This is when you need to consider your personal factors, since a break-even analysis tells you nothing about these relevant and important facts. Important personal factors to consider include health, family life expectancy, marital status, immediate financial needs, and quality of life.
For example, if you have health ailments and suffer from medical conditions that may prohibit you from enjoying a lasting quality of life, take the benefits at an earlier age.
If you’re married and about to become eligible for benefits, then perhaps one should take the benefit first, with the second postponing benefits until an older age. The postponement of the second would yield a higher payment when benefits would begin.
Regardless of what your factors might be, careful review of all of your options from a financial and personal viewpoint are prudent in order to arrive at the best decision for you.
Sources: Social Security Administration, GAO
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