June 5, 2023

An Overview of Social Security Timing and When to File 

There’s an old saying that the best time to plant a tree was twenty years ago. The second best time is right now. The same might also apply to your retirement and social security planning, as it’s never too early to start thinking about retirement. This involves considering many facets of your retirement, including when you plan to begin taking your social security benefits. 

The temptation to take your benefits as early as possible is completely understandable; however, it permanently reduces the monthly funds you will receive. So when is the best time to claim social security? To understand that, we first need to explore some rules and requirements for social security. 

Eligibility Requirements for Social Security Benefits

Americans can begin to withdraw their social security benefits at the age of 62, but your social security planning should begin long before this. 

Waiting longer to take your social security benefit will mean you have a higher monthly payment, which will continue for as long as you are alive. There may be benefits to waiting to retire until you reach your full retirement age, and it is important to consider this age, as it is when you can retire at this age and get your full benefit.

What Determines Your Full Retirement Age (FRA)?

Full retirement age (FRA) is when you can retire and receive 100% of your social security benefits. As such, there are certain advantages to waiting as long as possible before collecting social security. 

Every month you wait to retire increases your social security benefit by a set amount, capping at 100% of benefits when you reach your FRA. However, the amount the benefit increases varies based on the year you were born.

Different birth years affect your full retirement age and benefits. This change was made in 1983 as part of the Social Security Amendments of 1983. It was done to react to the increasing changes in life expectancy and how those changes would impact the social security fund’s solvency. These dates reduced the benefits withdrawn from the fund and created financial incentives encouraging people to work longer.

Your full retirement age (FRA) is as follows:

If you were born in:Your FRA is:
1937 or earlier65
193865 and 2 months
193965 and 4 months
194065 and 6 months
194165 and 8 months
194265 and 10 months
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 or later67

The Downsides to Collecting Early

As the social security administration explains, claiming your social security benefits early will result in a reduced monthly benefit throughout your life. This incentivizes older Americans to work longer and protects the fund’s solvency. 

Let’s look at an example. Say you have someone born in 1960 who wants to retire at 62. However, their full retirement age is 67. Due to their early collection of benefits, the individual in question would see their benefit reduced by 30%, and their spousal benefits would also reduce by 35%. 

As you can see, social security timing is critical, and it’s important to understand your overall benefits level when engaging in social security planning.

Reasons to Delay Your Social Security Benefits

There are many reasons why you should delay taking your benefits for as long as possible: 

  • Every month you wait to retire from the time you are fully eligible, you receive delayed retirement credits. The specific amount of the credits depends on when a person was born: Benefits increase by half of 1% for someone born between 1935-1936 but 2/3 of 1% for anyone born in 1943 or later.
  • Your benefits don’t just impact you: Working later means your spouse may also receive additional social security payments, as in some cases, your spouse’s benefits are determined based on your social security payments. 
  • Getting larger payments from social security will protect you from inflation: Benefits are increased based on inflationary pressures. So if you have a higher benefit, your benefit will increase by higher levels. 

Keep in mind that these benefits stop accruing at 70. As such, you lose a social security-based economic incentive to keep working if you choose to do so after this age. 

Calculating Your Social Security Benefits

A key component of social security planning is understanding how to calculate how much you will receive throughout your life. Fortunately, the government’s SSA retirement calculator can help.

This calculator can determine how much you will receive each month. However, remember that it requires you to know or estimate multiple factors, including how you will pay for healthcare, your rate of taxes, life expectancy, and more. You can also work with an experienced Financial Planner to help determine the right age to begin taking benefits.

You can also use this social security timing calculator to determine your age and how retirement — or continuing to work — would impact your benefits. For example, let’s say you wanted to retire in May 2023 and you were born on April 21, 1955, you could retire with no hit to your benefits.

However, being born on the same date in 1959 means earning only $21,470 annually without reducing your benefits, per the limits set by the federal government. These limits disappear as you age.

How life expectancy should affect your social security timing

More Americans are outliving their retirement savings. This is often called the ‘longevity risk,’ It should be a factor in any social security planning decision, as you risk outliving your savings and will need more money to retire. If you think you don’t have enough savings to support you in your retirement, your social security timing becomes critical: you may need to delay retirement to increase your benefit. 

You may want to conduct a personalized break-even analysis. This analysis allows you to determine the best retirement age and get the highest lifetime earnings.

How to Receive Spousal Benefits

Dependent spouses can collect a portion of their spouse’s social security, even if they have never worked. To collect such benefits, a spouse has to be at least 62. Like collecting your own benefits, spousal benefits are reduced if they are collected before your spouse reaches full retirement age. At the most, your spouse will never collect more than 50% of your benefits.

A spouse’s survivor benefits will be higher if their spouse retires later. As such, if you want to maximize benefits, you should wait as late as possible before collecting social security. On the other hand, early retirement can mean a major decrease in benefits, with benefits potentially being as low as 32.5% of what they would have been if you had waited until 70 to retire.

Are Social Security Benefits Taxed?

Social security benefits are typically taxed only if you earn other income, including a pension or investment gains. At the federal level, the taxes on these benefits depend on your tax bracket and how much you earn from these other forms of income. Depending on where you live, you may also have to pay state or local taxes.

Social Security Planning Strategies

Numerous factors go into creating a personalized social security planning strategy and when you will take your social security benefits.

First, looking at your personal finances and retirement plans is necessary. Will you have adequate income to support you in your early to late 60s? If yes, you may be able to afford to wait.

Next, consider the potential impact of spousal benefits. How will your benefit decision impact your spouse’s benefits? Will you positively impact your spousal benefits by waiting on taking your benefits?

Last, how does your benefit decision impact healthcare access? Will you have healthcare coverage separate from Medicare or Medicaid before taking benefits?

Health insurance coverage

Medicare premiums are automatically withdrawn from your social security payment. You can enroll in a health insurance plan that determines your yearly coverage. You can also enroll in additional health insurance plans, like an HSA. 

Your type of health insurance may mean you need a higher income level in your retirement. If that is the case for you, you may find waiting as long as possible advantageous before taking your benefits. 

Keep in mind that employer contributions for employee health insurance are facing increasing premiums. As such, the share of taxable payments going to the social security fund is decreasing. This could spell major challenges for the solvency of social security.

Investing your benefits for a potentially higher return

Waiting to collect benefits may mean getting more money. However, some people take an alternative route, albeit a riskier one. 

One common strategy involves taking social security benefits as early as possible. Then, a beneficiary will invest this money in the stock market, potentially leveraging these investments for higher returns. You can also do this by investing benefits early into a Roth IRA, which allows you to make tax-free withdrawals and enables your investments to grow tax-free. There are multiple potential benefits: You could achieve real stock market gains while reducing your long-term tax burden. 

However, a real risk is associated with this method as a retiree may invest and lose that money. If that’s the case, an individual would lose their social safety net funding and may be in major financial trouble. Therefore, this strategy may be worthwhile for some people. Still, it is worth mitigating the risk by investing in low-risk financial instruments or speaking with a financial advisor to guide your investment strategy

Calculate Your Social Security Timing With A Trusted Financial Advisor

Social Security planning and social security timing can be an extremely difficult and complex process to manage, especially for high-net-worth individuals. At Churchill Management Group, we have experts with experience guiding high-net-worth clients like you. We can assist you in making these deeply complex decisions and ensure you’re getting the most out of your social security investment.

Contact us today to learn more about how we can help with your social security planning.

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