Social Security is one of the most important sources of retirement income for most Americans. It provides a guaranteed stream of income that is adjusted for inflation and lasts for the rest of your life. However, the age at which you start taking Social Security can have a significant impact on the amount of income you generate in retirement. In this guide, we’ll explore the factors you should consider before deciding when to start taking Social Security.
How Social Security Benefits Are Calculated
Before we dive into the impact of age on Social Security benefits, it’s important to understand how these benefits are calculated. Social Security benefits are based on your average earnings over a period of years, typically the 35 years in which you earned the most. The Social Security Administration (SSA) adjusts these earnings for inflation and calculates your “primary insurance amount” (PIA), which is the benefit you’ll receive if you start taking Social Security at your full retirement age (FRA).
Full Retirement Age
Your FRA is the age at which you’re entitled to receive your full Social Security benefit. For people born between 1943 and 1954, their FRA is 66. For those born after 1954, the FRA gradually increases, reaching 67 for those born in 1960 or later. It’s important to note, though, that the FRA for those born after 1960 might change as Social Security undergoes potential reforms. If you start taking Social Security before your FRA, your benefit will be permanently reduced. Conversely, if you start taking it after your FRA, your benefit will be permanently increased.
Taking Social Security Early
If you start taking Social Security before your FRA, your benefit will be reduced by a certain percentage for each month that you start early. For instance, if your FRA is 67 and you start taking Social Security at age 62, your benefit will be reduced by 30%. This reduction is the maximum for those whose FRA is 66. The reduction could be less if the FRA is greater than 66. The reduction in benefits varies depending on your FRA and the number of months you claim benefits before reaching FRA. However, starting early may be a good choice if you need the income and don’t have other sources of retirement savings.
Delaying Social Security
If you delay taking Social Security past your FRA, your benefit will be permanently increased for each year that you delay. For example, if your FRA is 66 and you delay taking Social Security until age 70, your benefit will be 32% higher than it would have been at your FRA. This is true for someone whose FRA is 66, but the increase would be less if the FRA is greater than 66. The increase in benefits varies depending on your FRA and the number of months you delay claiming benefits after reaching FRA. Delaying Social Security can be a good choice if you have other sources of retirement income and want to maximize your Social Security benefits.
Delaying Social Security until the latest possible date is often beneficial for clients nearing retirement, as it can increase their retirement income if they anticipate living until or beyond life expectancy.
Other Factors to Consider
When deciding when to start taking Social Security, there are other factors to consider beyond the impact on your benefits. For example, if you’re still working and earning a high income, up to 85% of your Social Security benefits may be subject to federal income tax depending on your combined income. Additionally, some states also tax Social Security benefits. You may also want to consider your health and life expectancy.
You should also consider the impact on your spouse’s benefits if you’re married. Depending on their individual earnings records, a spouse may be eligible for benefits based on their own work record or up to 50% of the higher earner’s benefit. The decision of when to take Social Security can impact the amount of both the worker’s and the spouse’s benefits.
Deciding when to start taking Social Security is an important decision that can have a significant impact on your retirement income. By understanding how Social Security benefits are calculated and the impact of starting early or delaying, you can make an informed decision that’s right for your individual circumstances.
If you’re evaluating when to take Social Security and want to dive deeper into the factors mentioned above, please reach out for a one-on-one consultation.