Deciding When to Claim Monthly Social Security Retirement Benefits

This assumes you’ve been paying into the Social Security system for a while and will have a minimum of 40 credits in your name. Without 40 credits, you won’t get any monthly retirement income. One credit per calendar quarter; 40 credits equals 10 years.

If you’re still reading this, and will have a minimum of 40 credits at some point, the next question is whether you’re still working and paying into the system or whether the pandemic has pulled the rug out from under you and any monthly income is better than no monthly income.

Next, how old are you now? The earliest you can file to claim benefits is when you turn age 62. If that’s still on the horizon, it’s not yet an option. But if you have reached that point, you have until you’re age 70 to sign on the dotted line and start receiving benefits. Technically, you can wait past age 70 but you gain nothing from it so think of that as the end point. And it assumes you’re still alive at age 70.

There’s a huge temptation to sign up as early as you can. Virtually all of us like having a few extra bucks to either spend or save for a rainy day. The pandemic has literally given millions of us a rainy day excuse. The problem is that unless you plan to die soon, it’ll probably turn out to be a mistake. Only you won’t know it was a mistake until after it’s too late.

The criteria used by Social Security to determine just how much monthly income you’re entitled to is complex, to put it mildly. I’ve had people call their local Social Security office to gain some insights and find themselves more confused than when they picked up the phone. I’m supposed to be knowledgeable about this topic and it confuses me from time to time.

It was originally set up as a safety net to make sure people had a least some money coming in to help keep them alive when they became too old to work. All well and good.

Meanwhile, people aged more slowly as time went by, meaning there were more and more people eligible for benefits at time passed. In the early days, there were dozens of people paying into the system for every person receiving benefits. Today, there are only a handful of people paying into the system for every person drawing a monthly benefit.

To counter this, think back to 1983. The rules changed to cause those paying into the system to pay more from their monthly income. At the same time, the original age for becoming eligible to receive benefits was set back incrementally to age 67. Today, that’s almost everyone and there’s new pressure to push it back further to keep the system viable. Expect more fundamental changes to appear in the next few years as we’re due for some.

So when do you want to start your monthly benefits? As soon as you can or are there legitimate and realistic reasons to hold off for a while? BTW, age 67 is also called Full Retirement Age, or FRA. It’s the point in time when you’ll get the full amount based on your earnings history.

Take it at 62 and you’ll be hit with a penalty for claiming early, and that hit will last the rest of your life. So when will you die? If you’re gone by age 67, it’s a no-brainer that claiming early was a good idea. What’s your answer? Wait until age 67 and instead die at 68 and you and your family would have been better off if you’d claimed at 62.

The assumption has to be that you won’t die early and that the odds are you’ll live into your 80’s. To some extent that’s a function of whether you’re male or female but we’re talking averages here. As a financial planner, I encourage people to assume they’ll live to be 100. That may not be realistic yet but if you don’t take this approach, there’s a high chance your later years will be plagued by not enough money to pay your bills.

I’ve long argued that absent a compelling reason to sign up before your FRA, you should make every effort to wait until then. Here’s why.

For one thing, your earnings history used by the SSA (Social Security Administration) calculates your benefit using the 35 highest earnings years from when you first got a job and were given a number. If you’re still working at age 62, chances are you’re making more money than you were 35 years ago at age 27. If you keep working until age 67, the odds of your 35 year earnings history resulting in a bigger number are pretty good. Oh, another thing. If there were years when you made no money, they get added in and may be included in the 35 years.

Another reason is that for every month from age 67 back to age 62, there’s a reduction in the number that defines your benefit as reflected in the 35 years of earning history. Think of it this way. At age 62, based on your earnings history, they calculate a number that represents 100%. File early and whatever your number was changes from 100% to 70% at age 62. That becomes the fixed monthly benefit amount for the rest of your life. Oh sure, you’ll maybe get an annual cost of living adjustment, but it applies to the 70% number and not the 100% number.

Suppose you bite the bullet and sign up at 62 and then keep working. If you make too much money, ie your income at age 63 exceeds a certain threshold number, then the monthly benefit you signed up for at 62 takes another hit.

On top of that, again depending on how much you’re now making, some of that 70% benefit is now subject to ordinary income taxes that further reduces the amount you get to spend or save.

There are a lot more unknowns to take into account when choosing to file early. Do you have a spouse? Will they survive you and depend heavily on your Social Security benefits to sustain them for the rest of their life? That’s obviously a complete unknown too.

What is known is that millions of Americans rely heavily on whatever they get every month from Social Security to pay for groceries, for rent, for health care, all the things we take for granted if we’re not there yet and earning a living wage.

I don’t have a best answer for you. What I do know is that in my opinion, you’ll be glad you waited until at least your Full Retirement Age to claim your monthly Social Security retirement benefit. Always assuming you’re still alive at that point.

Tony Kendzior \ July 24, 2020

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