My Money Matters | November 2018

Claiming Social Security: Important Things to Consider

Social Security is largely a pay-as-you go program which, for many, provides a steady stream of income during their retirement years. Did you know that the age at which you begin taking benefits affects the amount you will be receiving on a monthly basis? Each individual has different needs and circumstances, but everyone should consider the following items before making a withdrawal decision.

The Advantages of Waiting

You become eligible to start receiving Social Security benefits as early as age 62. After years of hard work and paying into the system, the time has come for you to benefit. However, as tempting as is it may be to begin receiving benefits immediately upon eligibility, it might not be in your best interest. At age 62, your benefit check is 25 percent smaller than it would be were you to wait until full retirement age (66 or 67, depending on the year you were born). In addition, for each year you wait beyond full retirement age to begin receiving benefits, you may accrue up to 8% in additional benefits per year, up to age 70.

Your Health and Family History

So we’ve established that waiting to collect Social Security will yield a higher monthly payout. That’s a good thing if you have a family history of living to a ripe old age. But what if your life expectancy is shorter, due to family history, or illness? It’s difficult to predict how long each of us will live, but it’s something to think about when deciding on the age at which to begin collecting Social Security benefits.

Things to Remember about Social Security

1.       Your work and earnings history are important. The Social Security Administration factors in your 35 highest earning years when calculating your payment. If your total number of working years is less than 35, every year in which you didn't work will result in $0 getting averaged into your annual earnings.

2.       Social security is primarily funded by payroll taxes. Tax collected today is paid out to beneficiaries, and so as long as there are enough people working and paying tax, the program will be funded and benefits will be secure. Concern over changing demographics and an aging population may bring reforms like raising the age at which benefits can be collected, means testing for benefits, and increasing the payroll tax into the conversation. However, it’s unlikely anything drastic will occur until there is a looming shortfall.

3.       Your Social Security benefits are probably taxable at the federal level. According to Senior Citizens League, more than half of all retirees pay at least some tax on their benefits. In general, if you have other substantial taxable income, your benefits will be taxed.

Navigating the Income Gap

It is easy to see the advantages of waiting to receive Social Security benefits, but how do you manage your retirement lifestyle from age 62 to 67, or even 70?  The October edition of “My Money Matters” focused on defining this gap and developing a plan. If you have other sources of income during retirement—such as 401(k), 403(b), IRA, or employer’s pension—then the decision to delay receiving that Social Security check may be easier.

—Brant Jones, CFP