How to Choose the Best Age to Begin Receiving Social Security Benefits.
There are a number of factors to consider when deciding to take your social security retirement benefits. The decision is important to financial stability, especially for lower income households and the millions of Americans without retirement plans or funds. Find information below on many of the factors to look into, and think about, when deciding the best time to start to collect your retirement benefits from the Social Security Administration.
The magic number for retirement used to be to 65. Today, the retirement age is not set in stone. Many people choose to work well past 65 due to financial necessity or simply because they enjoy their work. Millions of Americans lack pensions and/or adequate 401K savings, and low income families or the undereducated may struggle even more financially if they go about this process incorrectly. The age at which you should begin taking Social Security benefits is similarly flexible and dependent on a variety of factors.
How are social security retirement payments calculated?
Social Security benefits are based on your highest 35 years of earnings. This means if you were a lower income earner, your social security monthly payments will be lower. In addition, you may begin to start taking benefits at age 62. However, each year you delay up to age 70 will increase your monthly payment. That is such as important factor for a lower income earner to consider and keep in mind. Whether and how long to delay must be considered with reference to your age, health, life expectancy, employment, and benefits to which your spouse may be entitled.
Determining your "full retirement age" is a starting point. This is the age at which you will be entitled to receive your full retirement benefit, although not the highest benefit allowable. For those born in 1960 or later, full retirement age is 67. For people born from 1943-1954, full retirement age is 66. Full retirement age for persons born in 1955-59 falls between 66 and 67. Calculating the specific month which qualifies as your full retirement age is important, particularly if you still plan to work after the date.
Your full retirement age is the exact age when your benefits are intended to be paid by the social security administration. If you claim your retirement benefits before full retirement age you get less money. On the other hand, if you file for retirement benefits after your full retirement age your monthly payment will increase.
While you can begin taking Social Security benefits at age 62, you will receive about 30% less per month compared to the amount you will receive at your full retirement age. If you do not have a pension or any other source of income during retirement, that 30% reduction can be enormous. Low income families will definitely feel that 30% hit to their retirement income.
That percentage lessens each year you delay. For example, if your benefit would be $1200 a month at a full retirement age of 67, you can being taking benefits at age 62, but your monthly payment will be around $840. That amount increases to approximately $900 at age 63, $960 at age 64 and up to the full $1200 amount at age 67. Benefits may be increased by a couple of percentage points per year for inflation, but the base amount will remain the same for the rest of your life.
Your potential benefit continues to increase even after reaching full retirement age. For each year you continue to delay collecting benefits up to age 70, your monthly benefit will increase by about 8% per year. A $1200 monthly benefit at age 66 increases to about $1584 at age 70. No further increases occur after reaching 70 other than annual adjustments for inflation.
The question everyone faces is whether to take a smaller benefit for a longer period of time or delay to receive higher monthly payments over a shorter period. While the general strategy of many financial experts is to delay taking benefits, the choice is ultimately a personal decision based on circumstances unique to the individual.
As an example, if you are a lower income household (and have historically been in), but you are in good health, then put off taking social security retirement for as long as possible – ideally until 70 years of age. As if you can still work, do not take a 30% reduction by deciding to take payments early. However if you are a lower income earner, and in poor health and can no longer work, then you may as well take benefits sooner rather than later before your body gives out.
Factors to consider when deciding on age for social security
Some of the most important considerations anyone should take into account are below. However low income families should put even more emphasis on this decision. As they more than likely will depend even more so on the retirement income from their social security benefits.
Life expectancy. If you are and have been in reasonably good health, it makes sense to assume you will have a long life. The average life expectancy for people now turning 65 is just over 84 years for men and nearly 87 for women. While of course no one knows for sure, but if you think you will meet or beat the average life expectancy, the wiser decision would be to wait as long as possible before collecting benefits. Maybe the life expectancy in your family runs on the long side and you have been in great health prior to your 60s, such as exercise, do not smoke, can stay at a healthy weight, etc.
Many people who fall short of the average life expectancy will still collect a higher lifetime benefit amount by delaying benefits until age 70. If you begin taking benefits at age 70, within about six years, you will have accumulated the same dollar amount in benefits you would have received by starting at age 62. If you expect to live beyond age 76, delaying benefits until 70 makes financial sense.
Other retirement resources including income. If you have few investments or other financial resources on which to rely once you stop working, or if you have no passive income, then receiving the highest monthly payment from Social Security by delaying benefits until age 70 is generally advisable. This is why a lower income person should wait to collect their retirement, as generally they have fewer investment to rely on; maybe they do not have a pension and even if they have a 401K, it is probably underfunded.
Generally, the older you get, the fewer options are available to increase income. Especially if you are not in good health. Accepting benefits too early may create financial hardship more quickly.
Medicare. You will be eligible to begin receiving Medicare at age 65. This has a current cost of about $135 per month for Part B medical coverage and $35 for Part D prescription drug coverage, however the amount will often increase each year. These amounts will be automatically deducted from your Social Security payment each month and need to be considered in your monthly budget.
If you have no other forms of affordable health insurance (some companies may offer health care to retirees), then this is another reason to wait to start collecting Social Security Benefits. As you will need to rely on that income to help cover increasing health care costs and medical bills. Find out more details on getting Medicare benefits.
Cost of living adjustment (COLA). Monthly Social Security payments increase by 1-3% most years to account for inflation. Increasing your monthly benefit by delaying the starting date will also result in larger annual increase amounts since the COLA will be applied to higher base payments. A 3% boost on an $840 benefit will give you an extra $25.20 a month while the same boost on a $1200 benefit will add $36 per month, an annual difference of about $130. This is due to compounding interest.
Spousal benefits. When spouses are both eligible to receive Social Security benefits, it may make financial sense for the spouse who will receive the smaller benefit, Spouse A, to begin taking it at 62 while the other spouse, Spouse B, delays at least until full retirement age. The delay not only allows Spouse B's benefit to increase but may also provide increased income to Spouse A should Spouse B die. Spouse A, as the survivor, will have the option to receive the higher amount to which Spouse B would have been entitled.
Working While Getting Benefits
You may begin collecting benefits at age 62 and continue to work, but the monthly payment may be reduced. If you are under the full retirement age and earn more than an annual earnings limit of $17,640, your monthly Social Security benefit will be reduced by $1 for every $2 you earn above the limit. For example, if your benefit is $800 and you also earn $1500 a month, you will exceed the earnings limit by $30 per month, which will reduce your monthly benefit to $785.
In the year you reach full retirement age, you can earn up to $46,920 before your Social Security benefit is reduced. For every $3 earned above the income limit, your benefit will be reduced by $1. Beginning with the month, you reach full retirement age, your Social Security benefit will not be affected by employment income no matter how much earn.
Claiming benefits before your full retirement age and continuing to work part-time may make financial sense and maximize income for a period. If you begin taking Social Security payments and your annual earnings exceed the amount for one of the years on which your benefit payment was based, your Social Security benefit will be recalculated. This may result in a higher benefit amount potentially offsetting earlier reductions.
Keep in mind your employment history, skill set, and energy as well. Also take a look at the big picture economy. As if the unemployment rate is low and the economy is booming, it may be more likely for a senior to get hired or there may be more work opportunities out there. However if you do not have in demand skills or the economy is weaker, depending on income as well as social security benefits may be more challenging – as you may not find a job. Or if you need help finding work, try the Senior Community Service Employment Program.
Changing Your Mind
If you begin taking Social Security benefits before the age of 70 and then change your mind within 12 months, you have one lifetime opportunity to return to square one. You may withdraw your application but must repay any benefits you received including the cost of Medicare. You can then reapply for benefits at a later time and receive a higher monthly payment as though you never previously applied.
Importance of the decision
Deciding at what age to begin taking benefits is a decision which will affect the rest of your life. Generally, extending your employment years will improve financial stability in retirement, but everyone has unique circumstances. Once you consider life expectancy, cost of health care, availability of other resources, and the lifestyle you hope to maintain in retirement, making your decision may become easier.