Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. There are many factors to consider, including your other retirement savings, your health, your tax situation, the claiming strategies available to you (think spousal benefits), and your lifestyle. This is one decision that can’t be taken lightly. In most cases, there are no do-overs.
How long do you think you will live?
The Social Security Administration calculates benefits based on life expectancy. The Administration’s actuaries project that the average 65-year-old man will live 84.0 years, and the average 65-year-old woman, 86.5 years.2 The calculation works like this: if you claim benefits early, like at age 62, you’ll receive a lower monthly payment for longer. If you claim benefits late, like at age 70, you’ll receive a higher monthly payment for less time. There is a point at which it evens out, and the Social Security Administration attempts to peg that point around life expectancy.
If you expect to live beyond average life expectancy, perhaps into your nineties and beyond, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (FRA), which varies from age 66 to 67 for those born in 1943 or later, your monthly benefit will be much larger than if you had claimed at 62.
If you are concerned that you may not live to life expectancy due to health concerns or family history, and if you are retiring early and need to supplement your income, claiming at or close to age 62 might make more sense.
Will you keep working?
If you claim benefits before your full retirement age, there’s a certain amount that you can earn before your Social Security payment starts being reduced. For tax year 2018, for example, if you were aged 62 to 65, received Social Security, and had income over $17,040, $1 of your benefits was withheld for every $2.3 The amount you can earn changes each year with inflation.
Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + nontaxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000 to $34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000 to $44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income taxes on up to 85% of their Social Security benefits.3 15% of Social Security benefits are exempt from taxation.
When does your spouse want to file?
Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household.4
Finally, how much in benefits might be coming your way?
Visit SSA.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple years might translate to a slightly higher Social Security income.1
A claiming decision may be one of the most significant financial decisions of your life.
Your choices should be evaluated years in advance – with insight from the financial professional who has helped you plan for retirement.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.