When Should You Take Social Security?

 

Rational Rule (if your want to skip the article but remain rational)

Wait to claim social security benefits as long as possible. Age 70 is great. Odds are you or your spouse will live well over age 80. Don’t rely on social security for more than 40% of your retirement income. Know your retirement income number well before you turn age 60.

Social Security benefits can be claimed at any point after you turn age 62, and most Americans take their Social Security as soon as they can.

Claiming benefits early can be smart, but it usually pays off to wait.

If you’re deciding when to start receiving Social Security, here’s what to consider. As usual, this is a rational take on social security, so we are leaving whimsy at the door.

Estimate your expenses

Retirement usually means a big drop in income, and if you don’t have a solid grasp on what your spending is going to look like in retirement, then you won’t be able to make the best decision on when to claim.

I always recommend planning to spend around 75% of your pre-retirement income. Be realistic. If you can’t cut your spending by 50% for a couple of months, you won’t be able to cut your spending in retirement.

Depending on who you talk to, experts usually recommend budgeting for 70% to 80% of your pre-retirement income to cover expenses in retirement.

However, the exact amount you need depends on your specific situation.

According to the Bureau of Labor Statistics (BLS), retirees spend the most money on home mortgages and auto loans, so if those loans won’t be paid off when you retire, you’ll need to budget accordingly.

If you have a house and car payments, consider downsizing your home or downsizing your car. You probably won’t drive as much and you definitely could use less space to accumulate possessions.

Healthcare is another big expense in retirement, and it’s usually smart to over-budget when it comes to planning for those expenses.

If you’re healthy, your costs might not increase significantly at first, but you’ll likely require more healthcare as you get older, and that healthcare is expensive.

Healthcare spending in over-65 households totals $5,877 per year, according to the BLS, including $4,029 for health insurance and another $694 for medicine.

Fidelity Investments estimates that a couple retiring at 65 this year will fork out over $275,000 in healthcare expenses during their retirement, and ultimately, that number could be even higher if you need long-term care. Do you have long-term care insurance? If not, get it.

Social Security options

If you’ve paid into Social Security over a career lasting at least 10 years, there’s a good chance you’ll qualify for benefits.

You can claim your benefits when you turn 62, but you’ll receive a reduced payment.

I repeat . . .reduced payment. This is the absolute least amount of money you can get.

If you go the claim-early route, apply three months before you turn 62, so that you can receive your first check in the month after you turn 62.

If you want to receive 100% of the benefit you’re eligible for, you’ll need to wait until you reach your full retirement age to claim.

Your full retirement age depends on the year in which you were born, but for people turning 62 in 2018, it is 66 years and 4 months. For me, that age will probably be like 120.

Your third option is to wait until after your full retirement age to claim so that you can receive delayed retirement credits. These credits increase your payment for every month beyond your full retirement age that you delay.

Overall, delaying increases your benefit by 8% for every year you hold off, until age 70.

This is the best option. Work until you’re 70 and reap those benefits. Odds are, you will live more than ten more years and those years will be spent traveling and relaxing with your wealth.

The following chart shows how much a Social Security recipient would receive if their full retirement age is 66, their benefit is $1,000, and they chose to claim benefits between age 62 and age 70.

While this example shows how benefits change depending on when you claim, the exact amount you’ll receive in benefits is determined by a complex calculation based on your highest 35 years of earnings.

You can create a login here to view your actual Social Security benefit, but the average monthly Social Security check is $1,404 in 2018, and the average social security check paid to age 62, age 66, or age 70 last year was $1,112.30, $1,382.78, and $1,510.49, respectively.

Once you know your expected Social Security income at age 62, age 66, and age 70 add to it any other sources of retirement income you’ll receive, such as pensions and investment income.

You can use an online calculator to determine this amount.

If you’ve thoroughly calculated your projected retirement expenses, then you should be able to use these numbers to determine the age at which you can reasonably expect to afford to retire.

For example, if you make $5,000 a month now and want to spend 70% of your income in retirement, you will need $3,500 a month. If you get social security of $1,500, thats still $2,000 a month you will need to earn elsewhere.

Important considerations

If you have ample income in retirement from other sources, it might make the most sense to embrace a claim-early and-invest strategy. As you can see in the following chart, waiting to claim benefits doesn’t break even with taking benefits early until you reach your late 70s or early 80s, depending on when you claim.

But if you claim benefits early and then invest that income, you could conceivably push that breakeven point back even further, depending on your annual returns.

It’s also important to consider the impact of claiming decisions on your spouse’s financial security after your death.

If your widow and widower is full retirement age, they can receive 100% of your benefit amount after you pass away, but only up to what you would otherwise be receiving if you were still alive. Therefore, if you claim early and receive a smaller monthly benefit, it may not be enough money for your surviving spouse to maintain his or her lifestyle. In our line of work, we see this mistake happen often.

Furthermore, if you plan on working into your early 60s, then you should know that if your income exceeds limits, the IRS will tax some of your Social Security until you reach your full retirement age. In those cases, delaying when you claim so that you lower your income taxes might be a smart choice.