When you first begin your career, Social Security might be the furthest thing from your mind. It’s just one more hefty deduction taken out of your paycheck — or so it seems.
In reality, Social Security is a significant part of retirement financial planning for many people. As we pay into Social Security throughout our working lives, we’re investing in our future selves. You’re building up a fund that you’ll have access to once you retire and stop working, or at least stop working so much.
The decision to claim Social Security in retirement is an important one, and so is the decision of when to claim your earned benefits. While it might seem like a bit of a no-brainer to claim your benefits as soon as you’re legally allowed, that might not always be the case. In fact, delaying your Social Security payments might be beneficial for a number of reasons, including some not-so-obvious benefits.
Understanding Social Security Basics
Before we can fully understand those benefits and what they mean for you, let’s review the Social Security basics. Look at it from the perspective of someone who’s closer to retirement than to the start of their career. This overview will involve a few unfamiliar terms and acronyms, but the basics aren’t all that complex.
By the way, you might hear the word “entitlement” in the context of Social Security benefits, but that simply means that you and your employer have already paid into the trust fund through the taxes deducted from each paycheck.
Calculating Your Social Security Benefits: Work Credits
The specific amount to which you’re entitled after retirement is based on your earnings over the course of your working life, based on “work credits.” These credits determine your eligibility for withdrawing your benefits after retirement. You need at least 40 credits total, and can earn up to four credits per year. So you’ll need to work at least 10 years to be eligible.
Average Earnings
The amount you’ll receive depends on two things. Primarily this is your average earnings and the age at which you elect to receive benefits. The Social Security Administration first calculates your Average Indexed Monthly Earnings (or AIME) based on your highest-paid 35 years of work. In other words, if you worked 40 years, starting at minimum wage and receiving annual raises (even small ones), then your benefits will be based on the most recent 35 years.
If you earned much more in the beginning of your career, but then took a job with a smaller salary, then the SSA will likely look at the first 35 years. Those earnings are indexed against a national average to come up with what’s called your primary insurance amount (PIA).
Age of Claimant
How old you are when you first elect to receive benefits is also a factor in how much you’ll get. You can file when you’re 62 years old, or you can put it off. Your “Full Retirement Age” (FRA) is the age established by regulations at which you’re first entitled to receive 100% of what you’ve contributed — and that’s not 62. If you were born between 1943 and 1954, your FRA is 66. That increases to 67 for those born after 1959. You must claim your benefits by the age of 70.
That’s the first benefit for putting off claiming Social Security: more money! If you claim at the first available opportunity, your benefits will be less than if you waited to your FRA — up to 30% less, in fact.
The SSA offers an online Quick Calculator to help you estimate your earnings based on a few pieces of information you provide. Online calculators won’t give you exact information, but they’re useful for estimations, especially in straightforward cases. For more precise information, you can authorize SSA’s tools to examine your individual records.
The Immediate vs. Delayed Claiming Dilemma
Those eight years between 62 and 70 might not seem like a long time. But, they can make a lot of difference to your financial picture in retirement. The dilemma facing U.S. retirees is a rather straightforward one: File sooner, but get less money per month, or put off receiving those benefits a few years and get more — sometimes, significantly more.
Many people wonder why anyone would ever want to cut their benefits by 30% by claiming them at the first opportunity. In fact, there are a few common reasons cited by early claimants:
- Poor health status/inability to work: As we age, health and physical condition can begin to deteriorate at different points in time. If you’re facing chronic or acute illness, disability, injury, or other impediments, you may not have much choice but to stop working sooner than you’d perhaps otherwise planned. If that’s the case, you may not be financially prepared to wait.
- Longevity: If you come from a long line of hale and hearty individuals who regularly survive into their 90s, and are yourself in good health, you’re facing an entirely different situation than someone your age who doesn’t expect to live long enough to claim at 70. When you may not live long enough to gain the benefit of that extra 30%, claiming early may make more sense.
- Misunderstanding the benefit reduction: Some people elect to claim early because they simply aren’t fully aware of how their benefits will be reduced by claiming at 62.
With that understanding, let’s look at the circumstances in which it’s better for you to wait to claim your Social Security retirement benefits.
Hidden Benefits of Delayed Claiming
Even if you’re in good health and don’t expect to die before the age of 70, it might still feel tempting to begin to claim your benefits as soon as you can. That’s understandable, especially in uncertain economic times with so much sociopolitical upheaval around the globe. However, in most cases, you’ll be far better off waiting to claim; there are several reasons why that is.
The biggest advantage to delaying your claim is in the increase in your monthly payments. As already noted, filing at age 62 means you lose 30% of your total PIA each month. The precise dollar amount will obviously depend on your earning power over your working life and how long you worked. This could be a substantial portion of your retirement income. Delaying your claim means your benefits will increase about eight percent each year until you reach 70.
Delayed claims can also improve your financial retirement life in other ways. The increased monthly payments can help you sustain a lifestyle closer to the one you enjoyed while working. It can also help you cover the ever-increasing costs of healthcare as you age. These benefits can in turn help alleviate the all-too-understandable financial anxieties many people experience post-retirement.
Finally, and perhaps surprisingly, a delayed claim may also benefit your husband or wife. When one spouse dies, the surviving spouse is eligible for benefits based on the deceased spouse’s PIA. Consequently, if you delay your claim, thus raising your monthly benefits to your full PIA, your spouse can also claim higher benefit amounts if you die.
Factors to Consider Before Delaying
With these considerations in mind, how should you go about deciding when to claim your Social Security benefits? Start by considering your physical health and ability to work. If you’re close to 62, and you’re experiencing health challenges that are making it increasingly difficult to maintain your usual work pace, you may want to consider claiming earlier.
Likewise, if you have a family history of shorter lifespans, it might be worthwhile claiming early. While no one can predict the future with any certainty, you can think about things like:
- The overall health of your parents and siblings after the age of 60
- Whether your family has a genetic predisposition to serious or terminal illness
- Any diagnoses of your own that might flare up or recur in later life
- Your general state of health and well-being
Next, analyze your overall finances. Is your retirement account well funded so that it will provide sufficient income to maintain an acceptable standard of living? Do you have adequate savings, investments, and other sources of income available to you in retirement? If so, delaying your claim makes more sense.
Strategies for Optimizing Delayed Claiming
If you’ve decided to delay claiming your Social Security benefits, your next step is to maximize your benefits and get the most out of them. The most direct way to do this is to simply work longer. If you’re able to continue working beyond your FRA, even on a part-time basis at a less demanding job, you can increase your earnings. As a result, you increase your benefits too.
Be aware that some strategies that could maximize benefits for married couples are no longer available. The most well known example of this was “file-and-suspend.”
Here’s how that used to work: When a wife reached FRA, she would file for Social Security benefits, with the husband claiming his spousal benefits. Then the wife would request the SSA to suspend her benefits. While her benefits were suspended, she would have accrued delayed credits, increasing the eventual benefit up to 8% each year. Meanwhile, the husband would delay filing for his own retirement benefits, but would collect his spousal benefits. This strategy was eliminated by federal legislation in 2015.
Another way to maximize your Social Security income is to work with an experienced, qualified financial advisor to help you craft a customized strategy. The right professional will take into account factors such as your spouse’s benefits status and estimated amount, tax implications, and your future plans.
Careful Planning Is the Best Antidote to Uncertainty
Waiting to claim your benefits is a proven, successful strategy in the right circumstances. And, it’s one that’s been popularly endorsed by many financial professionals and experts. Delayed claiming helps you maximize your benefits and provides enhanced stability during your retirement years, alleviating the uncertainty and anxiety that can result from the sudden life changes.
However, this decision is a critical one with multiple potential long-term consequences. It requires careful analysis, learning as much as possible about Social Security, and, when appropriate, the assistance of a financial expert to help you figure out your various options and what’s best for you. The right professional can assess your finances, including your assets, savings, and investments. They can help you create a comprehensive retirement plan, of which your Social Security benefits are an important part.
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