Deciding when to claim your Social Security benefits is one of the most important financial decisions you’ll ever make. Although you can apply for benefits as early as age 62, it’s not necessarily a wise move. Taking early retirement can have financial consequences—for example, you could end up decreasing your monthly benefit by as much as 25 percent over your lifetime. Once you elect to start your benefits, you generally lock them in for life.
Let’s take a look at what will happen if you elect to wait until full retirement age (FRA) to claim your benefits, instead of claiming them early. We’ll assume your FRA is 66 and your benefit amount is $1,800. The chart below shows that by claiming benefits early, your lifetime benefit will be reduced by 25 percent to $1,350. If you wait until the maximum age of 70 to claim your benefits, you will receive a lifetime benefit of $2,376. In this scenario, your benefits would increase by eight percent for every year you wait after your FRA:
Retirement Age Benefit Amount
62 $1,350
66 $1,800
70 $2,376
Unfortunately, there is no one-size-fits-all approach when it comes to Social Security. However, there are some ways to maximize the amount you collect. If you’re married, there is a technique called file and suspend that could add thousands of dollars to your retirement. File and suspend allows an individual to apply for Social Security benefits at FRA and immediately suspend the benefits. This allows the individual to continue to work and earn delayed retirement credits, while his or her spouse at their FRA can claim the working spouse’s benefit instead of a reduced one. If you are married and have attained FRA, you can claim a spouse’s benefit and then switch to a benefit based on your own work record at a later date.
You should also think about whether you’ll want to keep working after you start claiming Social Security benefits. Consider the following:
- If you are under the FRA in 2013, you can earn $15,120. If your earnings exceed this amount, then $1 of benefits will be withheld for every $2 you earn above $15,120.
- If you attain FRA in 2013, you can earn $40,080 in the period before the month in which you attain FRA with no reduction in benefits. If your earnings exceed this, then $1 in benefits will be withheld for every $3 you earn above $40,080.
- After FRA, a married couple can earn up to $32,000 in 2013. If your adjusted gross income (AGI) exceeds $32,000, but is less than $44,000, up to 50 percent of your Social Security benefits will be subject to tax. If your AGI exceeds $44,000, up to 85 percent of Social Security benefits will be subject to tax.
It may sound like a lot to think about, but you can plan ahead. Start by accessing your Social Security statement at socialsecurity.gov to see where you stand. Once you reach age 60, you can request to have a statement mailed to you annually. And remember to give special consideration to your individual tax situation and alternate sources of income. Your financial advisor and tax professional can help you determine a course of action if you need assistance. iBi
Daryl Dagit is a financial advisor with Savant Capital Management. Savant’s Peoria office is located at 7535 N. Knoxville Avenue, Suite C.
