Determining when to begin receiving Social Security

A key question people ask when planning for retirement is: "When should I begin receiving Social Security benefits?" The right answer depends on each person's individual circumstances. Estate planning also factors into the equation. For example, the amount of funds you and your spouse need to continue your desired lifestyle during retirement will affect the amount of wealth you ultimately are able to pass on to your heirs.


Age affects monthly benefit amount

You can begin receiving Social Security benefits as early as age 62 or as late as age 70. The longer you wait, the higher the monthly benefit. This is because the system is designed to provide you with roughly the same total benefit (based on government life expectancy tables) regardless of when you begin receiving payments.

If you start benefits before your ?normal? retirement age, you will receive a smaller check over a greater number of years. If you start later, you will receive a larger check over a smaller number of years.

If you were born at any time in 1943 through 1954, for example, your normal retirement age is 66. If you start receiving benefits at age 66, you are entitled to a full benefit based on a formula tied to your earnings history. Many people can maximize wealth accumulation by delaying Social Security benefits to normal retirement age or even later.


Calculating your break-even point

Assuming that you can live comfortably without Social Security benefits, when is the optimal time to begin receiving them? A useful tool for choosing the right starting age is to calculate your break-even point.

For example, Jan, who is retired, is about to turn 62. She is trying to decide between taking a reduced Social Security benefit right away or waiting until her normal retirement age of 66. Her full monthly benefit at 66 would be $2,000 and her reduced benefit at 62 would be $1,500.

Ignoring cost of living adjustments for simplicity, Jan's break-even point is just before her 78th birthday. At that point, her total benefits will be about the same whether she starts at age 62 (192 months x $1,500 = $288,000) or at age 66 (144 months x $2,000 = $288,000). If Jan lives to at least age 78, waiting until age 66 to start collecting will provide her with greater lifetime benefits. If she does not reach that age, she is better off starting at age 62.

Suppose that Jan's mother and grandmother both lived to be 90. If Jan follows suit, she will receive more than $72,000 more in Social Security benefits by waiting until her normal retirement age of 66.

After determining your break-even point, the right choice for you depends on several factors, including your actuarial life expectancy, your health and your family history. Also, keep in mind that the above example does not consider potential earnings on Social Security benefits. If you plan to invest your benefits, you may need to adjust your break-even point upward or downward, depending on your expected rate of return.


Working past eligibility age

If you plan to continue working after you become eligible for Social Security, you are likely better off delaying benefits at least until you reach your normal retirement age. If you start any time before the year in which you reach your normal retirement age, your benefits will be reduced by $1 for every $2 you earn above a certain threshold ($14,640 in 2012). So, for example, if your benefit amount is $1,500 per month, or $18,000 per year, your benefits will be eliminated if you earn $50,640 or more.

After you reach your normal retirement age, you can continue working without reducing your Social Security benefits. But keep in mind that, if your income exceeds certain limits, a portion of your Social Security benefits will be taxable.

Seek your advisor's advice

Several factors must be considered when determining the ideal time to begin taking Social Security benefits. Your estate planning advisor can assess your (and your spouse's) circumstances and help you maximize the potential value of your Social Security benefits.

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