You’ve worked hard to build your Social Security account. As with all financial assets, it makes sense to maximize the return on your investment—of time and effort. So, with decades of experience, why is it still so difficult to make the right choice regarding when to start claiming Social Security benefits? The short answer: it’s personal.
It’s a sensitive topic, but a sizeable part of the decision about when to start claiming your Social Security benefits should be based on your life expectancy. After all, the benefits are guaranteed for life. By claiming benefits as early as possible, at age 62, it would seem that you would be maximizing the total value of your monthly checks. That strategy would give you an eight-year head start on the latest option, at age 70. If only it were that easy.
Whenever you start claiming benefits, you are generally locked into that monthly amount, plus the annual increases that track inflation. If Social Security were triggered at the same age for everyone, things would be simple—but you would lose out on the possible upside. And the government would probably end up paying a lot more in benefits than it already does. That’s why there’s a choice about when to start claiming benefits. Unfortunately, it’s a choice that many retirees get wrong. Here’s how it works, and why you should start thinking about the timing of your Social Security benefits as an important decision in managing your portfolio. Of course, you should consult with a tax professional as well.
Today, full retirement age is 66 or 67, depending on when you were born. It was 65 in 1937 and delayed by two additional months a year, until 1960. Since then, normal retirement age has remained at 67. The folks at Social Security would like to hold off on sending you benefits as long as possible. So much so, that they are willing to increase your monthly check by 8 percent for every year you delay starting, from age 62 to age 70—if you were born in 1943 or later. On the flip side, you are penalized significantly by claiming benefits before full retirement age.
So, if you believe that you will live well past 70, you may receive considerably more in the long run by waiting until then to start your benefits. The additional amount in your initial and subsequent checks could break even with the earlier claim option sooner than you think. From then on, your monthly benefits would continue to add up faster than they would have otherwise.
If there are two earners in the household, you have other factors to consider. There is no need to start claiming benefits at the same time as your spouse. And there are strategies for deciding which person should claim first. In general, the lower-earning spouse should claim benefits earlier than later. Survivor benefits for spouses also depend on the timing of the benefits claim. Again, the earlier you start, the less you or your surviving spouse would receive.
Just because you can start receiving Social Security benefits doesn’t mean you should. Whether it’s with the help of a financial advisor or not, make sure your timing is based on what’s best for you and not what might turn into a “sounded like a good idea at the time”!
5 Things to Consider Before Starting Social Security Payments
1. If you and your spouse will both claim benefits eventually, the timing should be planned carefully. Normally, the lower-earning spouse should claim first.
2. It’s never easy to consider your own mortality, but this decision relies on an objective prediction of how long you are likely to live—beyond 62 and beyond 70—in order to estimate the total lifetime benefits if claimed at different ages.
3. Since women still tend to outlive men, you’ll want to consider gender as a factor, whether it’s for an individual or for spouses.
4. If you are in a higher tax bracket, your benefits may be taxable. A review of the tax implications may influence the timing of your claim as well.
5. Whatever you decide, make sure that you are making an objective decision. Your financial advisor should provide you with that objectivity and help you make the choice within the context of your entire portfolio.
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