When Should You Claim Social Security?

By Mitchell J. Smilowitz, CPA

For most of us, Social Security will make up a significant portion of our retirement income. Because Social Security benefits vary by the age you begin receiving them, this is one of the biggest retirement planning decisions you will make. This article addresses some of the factors to consider surrounding when to begin collecting Social Security.

What Is Your Full Retirement Age?

Your Social Security benefit is calculated in relationship to your full retirement age. Those who begin claiming benefits before reaching their full retirement age receive less each month; those postponing benefits beyond their full retirement age receive a larger monthly benefit. This decision will affect the size of your benefit for the rest of your life.

Full retirement age for Social Security benefits is gradually increasing to 67 as a result of 1983 legislation designed to shore up the program’s finances. The following table shows how the full retirement age for Social Security recipients is changing.

How Do Benefits Vary Based on Retirement Age?

Your Social Security benefit is based on the number of years you contributed and the amount you earned during those years. You must contribute to Social Security for at least 40 quarters (10 years) in order to be eligible. Social Security averages your highest 35 years of earnings to determine your benefit. If you contribute for fewer than 35 years, Social Security assigns zero income for the years you did not contribute. The formula also accounts for inflation.

To examine the impact of age on Social Security benefits, see the table below. It estimates what somebody retiring in 2018 can expect to receive based on their average salary and the age at which they decide to claim benefits. Please remember that this estimate does not include cost of living adjustments or changes in your income that may occur during your working life.

The impact of claiming Social Security benefits early is clear. Beginning your benefit at age 62 – the earliest age possible – reduces your benefit by approximately 25% compared with the benefit available at your full retirement age. On the other hand, delaying beyond full retirement age increases your benefit by 8% per year until age 70.

The Social Security Administration provides an on-line calculator that allows you to estimate your benefit based on your date of birth, estimated annual earnings and planned retirement date.

When Should You Begin Collecting Social Security?

As with many decisions involving financial and retirement planning, there is no one-size-fits-all answer. But there are several issues to consider before you choose when to begin Social Security.

  • Longevity. If you are in poor health, you may decide to claim Social Security sooner even though you receive a smaller benefit. Conversely, if you are in good health, you may consider delaying Social Security in order to maximize your benefit.
  • Working while receiving benefits. If you begin collecting Social Security before your full retirement age, your Social Security benefit is reduced for each dollar you earn. At full retirement age, working no longer reduces your benefit.
  • Income taxes. You will continue to pay taxes in retirement. Taxes are calculated on your annual income and the sources of that income. The taxable amount of Social Security depends on how much other income you have. This includes retirement accounts, investment income, annuities and wages.
  • Spousal benefits. The ability of your spouse to claim their own Social Security benefit can impact the decision on when to begin yours. If your spouse’s benefit provides the income you need in the early years of retirement, you may decide to postpone collecting Social Security and let your monthly benefit increase.

Choosing when to begin collecting Social Security plays an important role in your retirement planning. Your decision depends on your other sources of retirement income, your health and you and your spouse’s work plans. This article provides basic information on these topics; to discuss effective ways to integrate Social Security into your retirement income, please contact the JRB via email or call 888-JRB-FREE (572-3733).