Unraveling the Mystery of When to Claim Social SecuritySubmitted by Korhorn Financial Group, Inc. on November 20th, 2019
By Bill Mock, CFP®, CRPC®
Did you know that claiming Social Security is one of the biggest financial decisions you’ll ever make? Few people do, which may be why so many Americans claim as soon as they are eligible (typically at age 62). Whether your decision is based on “facts” overheard from friends, neighbors, and co-workers; emotions; or FOMO (the fear of missing out!), claiming at 62 can be a costly mistake that significantly decreases your monthly income for the rest of your life.
How much can claiming early really cost you? Your benefits will vary dramatically based on whether you claim at 62, at 67 (full retirement age for anyone born after 1959), or at 70 when benefits peak. Here are the current maximum monthly income payments based on when a claim is filed according to the Social Security Administration:
- $3,790 per month for someone who files at age 70
- $3,011 for someone who files at 67 (or full retirement age)
- $2,265 for someone who files at 62
To save you from doing the math, the difference between claiming at 62 or 70 is an astounding $1525 per month, or $18,300 per year. Considering that the average length of retirement is 18 years, this means that waiting until age 70 to file for Social Security could increase your benefit by almost $112,000 over the course of an ‘average’ retirement—and much more than that if you live past the age of 80.*
Those numbers are impressive, but even that basic calculation doesn’t mean that everyone should claim at age 70 or that no one should claim at age 62. The truth is that the best strategy to maximize your total lifetime benefits depends on a long list of details about your personal and financial life. Here are just a few of the questions we consider when advising clients when to claim Social Security:
- What is the age and earnings difference between you and your spouse?
My wife and I are becoming something of a rarity in this day and age: our birthdays are 6 months apart, we’ve been together 22 years, and our incomes are relatively equal. For couples like us, the Social Security equation can be pretty simple. But what if your spouse is years or even decades younger? What if only one of you is bringing home a paycheck? Because spousal benefits from Social Security are based on the other partner’s benefit amount, if income is needed before one or both of you turn 70, it may make sense to have the lower-earning partner claim spousal benefits at age 62. This enables the higher-earning partner to wait until age 70 to claim benefits, increasing that monthly income by 8% per year. It’s important to note, however, that claiming spousal benefits at 62 will reduce benefits for this partner because he or she filed early. Again, it’s a balancing act that requires careful calculation. (And if the income is not needed, there’s no reason for either partner to file for any benefits before age 70 at all!)
- Do you have dependents age 18 or younger?
Multiple marriages and late-age adoption are more common than ever, which means that it’s also more common for men and women over 62 to have minor dependents. In this case, a child may be eligible to receive up to half of the parent's full retirement or disability benefit. However, a dependent can only claim benefits if the eligible parent is currently claiming benefits, so here, too, it is important to consider the total lifetime benefit before choosing this option. A child can also receive a survivors benefit of up to 75% of the deceased parent's basic Social Security benefit.
- What is your expected income level in retirement?
Surprisingly, this isn’t about how much income you need from Social Security, but how much income you’ll lose to taxes. Social Security benefits are taxed on a sliding scale based on your total taxable income. While 50% of your benefit is taxable when your income is between $32,000 and $42,000 (2019, filing jointly), if your income is more than $42,000, 85% of your benefit is taxable. In some cases, adding Social Security to your annual income could also push you into an income bracket that could reduce other important benefits, such as healthcare coverage. In these cases, it may be more beneficial to allow your benefits to increase rather than taking the benefit simply to lose it in taxes or lost benefits.
- Are you divorced or widowed?
Even if you are divorced from your spouse, you still have a right to spousal benefits. As long as your marriage lasted 10 years or more, and you’ve been divorced at least two years, and you are currently unmarried, you may have rights to full spousal benefits (about 50% of your ex-spouse’s benefit amount). Claiming spousal benefits has no effect on your ex’s benefits, and he or she doesn’t even have to be aware that you are making the claim. If you’re a widow or widower, your benefit jumps to 100% of your partner’s benefit amount.
- Are you a woman?
Statistically, women live longer than men—which can be a blessing and a curse. Women may get to enjoy more time with their grandkids, but it also costs much to support their longer lives. The 8% “raise” that comes from each year benefits are delayed between full retirement age and your 70th birthday will boost your monthly check by $1525/month or more, plus an additional cost of living adjustment each year. That’s income you’re more likely to need if you’re a woman!
- How healthy are you?
Poor health is one of the few situations when it may truly make the most sense to claim Social Security early. If your lifespan is likely to be decreased significantly, claiming your benefits as early as you can is likely your best option to ensure you receive the greatest possible amount during your lifetime.
Clearly, there are many (many!) variables when it comes to deciding when and how to claim. What I’ve listed here is just the tip of the iceberg, which is why we use a calculated approach to analyze each client’s complete financial picture. This approach can help a client choose the option that is most likely to maximize their total lifetime benefit. To determine the best possible option for you, your best bet is to work with a Certified Financial Planner™ (CFP®) who understands the nuances of both your own financial life and the complexities of Social Security. Instead of trying to unravel the mysteries of Social Security yourself (and possibly making a poor and nearly always irrevocable decision!), work with a professional who can help.
One last word of caution: Don’t be tempted by the myth of the “break even point”!
There is some analysis that points to a “break even point” at age 77. This calculation can make filing early look great on paper, but remember that your real goal should not be to break even on a lump sum, but to secure a higher monthly income over the long term. To learn more about this and the other big myths about Social Security, check out this episode of the Wise Money Show.
Looking for more financial insights from Korhorn Financial Group? Subscribe now to The Wise Money Show, our weekly podcast created to help you get wise about your money. New episodes are available each Saturday on our website and social media feeds (Facebook, Twitter, and LinkedIn), and on our YouTube channel where you'll find behind-the-scenes footage of every episode and great bonus content. Check out The Wise Money Show today!
*Based on an increase of $329,400 minus the $217,440 in benefits not received during the 8-year delay.