Social Security Planning: When to Take Benefits?

social_security_2As discussed last week, there are several factors to consider when deciding when to start receiving Social Security benefits. The amount of benefits you receive varies depending on whether you choose to receive benefits before, at, or after your FRA (Full Retirement Age). Choosing to receive benefits early reduces the monthly amount you receive, while delaying your receipt of benefits maximizes your monthly benefit.

The three main factors which can help you decide which option is best are mortality, marital status, and taxation. This week I’m going to talk about the first one, mortality, and how to start thinking about whether to take your Social Security benefits early, on time, or late.

Mortality is the easiest factor to understand, but it may be the hardest to predict accurately. For how many years past your FRA will you live? When will you need to start making major payments for things like long-term care, and for how long will you require long-term care services? The answers to such questions may help you determine when to start receiving Social Security benefits.

Despite the fact that people are living longer, according to the SSA’s Annual Statistical Supplement for 2011, 74% of Social Security recipients have chosen to start receiving benefits early. This can be a huge mistake because the total early retirement benefit is less than the total full retirement benefit if you collect for more than about 15 years (depending on the monthly benefit). In other words, if you think you will likely collect benefits for 15 years or more after early retirement age, then you will be better off waiting and taking benefits at your full retirement age instead of taking them early.

If you think you are not likely to collect for 15 years after early retirement age, taking the benefit early does make a lot of sense. For instance, if you believe certain factors in your life, such as current health issues or family history, make it likely that you will pass away at a relatively early age, then choosing to take your benefits early might be the best option. In that case you maximize the number of months in which you receive a payment and you can utilize your benefits to help you manage your current conditions. As well, you are anticipating a limited number of years of long-term care ahead. However, if you have no reason to believe that your lifespan will be shorter than average, you should not elect to take benefits early – otherwise your overall benefit will be significantly reduced. On the other end of the spectrum, if you anticipate a long life and you currently have the resources to support yourself without the aid of Social Security, it is wise to delay receiving your benefits. By delaying benefits you increase the monthly amount you will receive, and you save your Social Security funds for when you are likely to require the most costly long-term care.

The percentages of benefit reduction or gain based on early or delayed receipt of benefits varies monthly. Based on a FRA of 66 and assuming that you choose to start receiving benefits in the month that your age changes, here is an idea of how your benefits might change from one year to the next:

Age Benefits (% of PIA)
62 75%
63 80%
64 86.6%
65 93.3%
66 100%
67 108%
68 118%
69 124%
70 132%

You can see that your dollars are earning an 8% rate of return by delaying receipt of benefits. In today’s economy that is a great rate of return. After age 70 there is no point in delaying benefits, as the figure does not continue to increase.

For more information about Social Security planning, check out the Social Security retirement planner. You can also get in touch with us at Elder Law of East Tennessee, and we will help you think about the array of options and the choices that will be best for you.

Our Social Security series continues next Monday with “Social Security Planning:  Options for Spouses.”

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