Your retirement income plan sets the stage for nearly all of your financial decisions. It informs your spending and saving habits and provides you the means to fund your ideal lifestyle. Creating a strong plan that supports your income and cash flow is necessary as you navigate your golden years. A big part of that income plan comes from Social Security.
The Social Security Administration (SSA) estimates that the benefits replace about 40% of your income in retirement. Implementing smart Social Security strategies will help you maximize your benefit and boost your monthly check. Social Security has many moving pieces and one of them is figuring out when to collect your benefit.
Before we dive into that, let’s take a closer look at what Social Security is, how it works, and how your benefit is calculated.
What Is Social Security?
Social Security is a government program designed to help retirees supplement their income. President Roosevelt signed it into law in 1935 and though many changes have been made over the past 85 years, the integrity of the system is still the same: providing income to those who can’t or are no longer working.
It is important to note that Social Security provides benefits to more than just retirees it also serves disabled workers, dependent children, spouses, and surviving spouses.
In order to qualify for Social Security benefits, you need to accumulate at least 40 work credits. While the exact figure changes year to year, in 2020 you get one work credit for every $1,410 in earnings up to a maximum of four credits per year. You earn credits when you pay social security taxes. Keep in mind that while you need work credits to qualify for Social Security, work credits don’t inform your total benefit.
How does the SSA calculate your benefit? Instead of basing your benefit off of work credits, the SSA calculates your benefit based on your lifetime earnings. They calculate your average earnings for the 35 years in which you made the most money and then apply that to their formula to come up with your primary insurance amount (PIA) or monthly benefit. The PIA is the amount you are eligible to receive at your full retirement age (FRA).
Is there a way to impact your monthly benefit? The answer is yes. The most significant change you can make to your benefit is when you decide to start receiving it. In general, there are three time frames for collecting Social Security:
- Early, at 62
- On-time, at full retirement age
- Late, at 70
We are going to explore each of these options by digging into the pros and cons to help you figure out which is best for you.
Collecting early at 62
The earliest time you can collect benefits is at 62, which in turn makes it one of the most popular times to enroll. After all, you have been working all these years, doesn’t it make sense to start reaping the rewards? Not quite.
By collecting at 62, your monthly benefits permanently decrease by about 30%. This is a huge cut for your income plan and cash flow. Say, for example, Will’s estimated primary insurance benefit is $1,750, by collecting early his monthly checks decrease to $1,225. That $525 could have been used to pay Medicare premiums or added to an investment account or included in Will’s annual charitable contributions.
If you start benefits at 62 and wish to withdraw your application the SSA allows you to do this within a year of starting benefits. By withdrawing, you would be responsible for paying back any money you received. Say that you had been collecting benefits for 6 months, you would need to pay back all of your benefits for that time. In Will’s case that would be about $7,350. Keep in mind you can only withdraw your application once.
There are, however, times when it makes sense to start collecting benefits at 62 like for those who need immediate access to the funds to pay bills or who are in poor health and want to make the most of the funds. It is all about balancing your income needs, retirement lifestyle, budget, and your health.
Collecting at full retirement age
Your full retirement age is the time when the SSA initially designed for you to receive your benefit. FRA is determined by the year you were born. See the chart below to find yours.
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
By waiting until your full retirement age, you are able to collect 100% of your benefit. Take Will from the example above. Let’s say he was born in 1961, that means that his full retirement age is 67 and by waiting until then he is eligible for the full $1,750 monthly checks.
The SSA provides many tools for calculating your primary insurance amount which is excellent for retirement income planning as it helps you plan out your monthly payments. Collecting “on time” is a great option for many people, but as the FRA continues to increase it can make it difficult for some to wait.
Collecting late at 70
When people talk about being late, it isn’t always in a positive light but with Social Security, that’s not the case. Every month that you postpone your benefits after your full retirement age, you accumulate delayed retirement credits (DRC). These credits continue to add up until you reach 70 at which point you could increase your monthly benefit by about 25%.
Let’s bring Will back to demonstrate. Will’s PIA is $1,750, but Will is in good health and has other sources of income to cover his living expenses and decides to wait to collect benefits until 70. That means that his monthly checks increased by about $440, making the new total $2,190.
If you can, delaying benefits is a wonderful option. You are able to significantly increase your monthly income which could leave room for other lifestyle goals like travel, home upgrades, charitable giving, aiding in your grandchildren’s education, and more. But there are plenty of downsides as well such as your current income needs, health considerations, and other retirement goals.
Which option is right for you?
No two retirement plans are built alike. Each couple has their own needs, goals, and aspirations for retirement which will make income planning unique to each person. When thinking about when to collect Social Security, keep the following in mind:
- Your current (and future) income needs
- Cash flow and other streams of income
- Your health
- Maximizing a survivor benefit for your spouse
- Retirement and lifestyle goals
Social Security is an important part of your retirement plan. Our team at Step by Step will help you evaluate your needs and create a strategy that will optimize your goals both now and in the future. Schedule a call with our team to learn more about how Social Security fits into your retirement plan.