Your specific facts and circumstances will contribute to the answer to this question. Receiving benefits earlier generally limits the amount you will receive in the long run. However, you may not be thinking of the long run — there may be a good reason to take money out of the Social Security pot early. After all, you’ve been contributing to it your entire working life, and not everyone lives to be 90.
Here are some guidelines to help you decide when it is the best time to take your Social Security distribution.
Let’s begin with some facts… You can begin receiving your Social Security benefits as soon as age 62, but that’s not considered your “full retirement age,” (FRA). Full retirement age is when you are eligible to receive 100% or your social security benefits. Your FRA is somewhere between 65 and 67, depending on the year you were born. If you were born before 1955, your FRA is 66. The FRA rises two months per year from 1955-1960. So if you were born 1960 or later, your FRA will be 67.
If you start collecting benefits at 62, your monthly benefit will be reduced based on the number of months you begin collecting before your FRA.
The Social Security Administration puts it this way: If your FRA is 66, and you begin collecting benefits at 62, your benefits are reduced by 25 percent; if you begin collecting at 63, the reduction is 20 percent; at 64, 13.3 percent; and at 63, 6.7 percent. If your FRA is higher than 66, your reductions for early collection will be more.
Something else to consider if you collect benefits before your full retirement age: the amount you can collect is reduced by $1 for every $2 that you earn over the earnings limit (in 2017 the earnings limit is $16,920). Once you reach full retirement age, there is no earnings limit. That means no reduction in benefits no matter how much you earn.
The SSA also rewards you for waiting beyond your FRA to start collecting. You get about an 8 percent boost for each year after your FRA up until 70 that you wait to begin collecting those monthly checks. That would increase your monthly benefit by 32 percent if you wait until 70. The increase is prorated by the amount of months you wait above and beyond your retirement age. Also remember, if you wait to receive benefits, you lose out on those years of benefits you would have received. To illustrate this, let’s go through an example: You could receive $1,000 if you retire at your FRA (let’s say it’s 66). If you wait until 67 to receive benefits, now you will receive $1,080 per month (an 8% increase). However, you lost out on $12,000 of benefits you would have received while you were 66. It takes 12.5 years for the $80 per month increase to surpass the $12,000 that you gave up. This does not take into account how much money you could earn on that $12,000 if you had set it aside after collecting it.
Under the example shown, it appears that taking the money at FRA is the most prudent if you can invest it and make any sort of return. However, if you are still working at FRA, your wages could make more of your social security benefits taxable. In this case, the math for which decision leads to the most wealth accumulation becomes very specific to your situation.
So it sounds like collecting Social Security as soon as you’re eligible is a horrible idea, and waiting at least until FRA is the best idea, right?
Well, for most people, delayed Social Security gratification is a good idea. But for some, taking the money and running early makes sense. Here are some two basic reasons to start taking your checks at 62.
- Financial need:If you need the money to buy the basics — rent, food, Netflix — then take the money you deserve. You won’t be alone, because a majority of people on Social Security start collecting before their FRA.
- Health need:If you don’t expect to live to the ripe old age of 80 or 90, it makes sense to start collecting Social Security as soon as you can. Chronic illness, realistically, can shorten your life and leave Social Security money on the table if the worst happens.
What’s right for you? If you have any questions about when to take social security, please contact us.
