Cracking the Social Security code
Should you begin taking checks at 62, 65, 67, or 70? Here are the factors that can help you decide.
When do most people begin taking Social Security?
The most common age that Americans file for Social Security is 62, the earliest age at which they are eligible. In 2013, for instance, 48 percent of women and 42 percent of men who claimed benefits were age 62. Signing up as soon as possible comes at a price, though: Monthly payments at age 62 will be up to 30 percent lower than what they would be if payments began at what’s known as “full retirement age,” which differs depending on the year in which you were born. Every year you delay payments before your full retirement age, the more money you get. For example, if you were born in 1960 or after, your full retirement age is 67, at which point you receive 100 percent of your benefit; if you take Social Security at 64, your payments are 20 percent lower than full value, and at age 66, they are 6.7 percent lower. Among retired workers, monthly benefits in December 2016 averaged $1,519 for men and $1,202 for women.
Are there advantages to waiting longer?
Absolutely. Every year you wait past your full retirement age results in annual increases of up to 8 percent in payments. For those born in 1956, who will turn 62 this year, full retirement age comes at age 66 and four months, when they would receive 100 percent of value. If they waited a year longer than that to file, their monthly payments would be issued at 108 percent. And if they waited until age 70, their monthly payments would be issued at 129.3 percent. The increases are capped at age 70, so there’s no advantage to waiting longer than that. These advantages are also being pared back for future retirees. For those born in 1960, who will reach full retirement age at 67, waiting until 70 will result in an increase only to 124 percent.
What’s the case for filing earlier?
Despite the financial advantages of waiting, there are some good reasons to take payments earlier, depending on your situation. You might need the payments out of financial necessity. If you’re making high-penalty withdrawals from retirement savings to get by, it might make sense to take early Social Security instead. Similarly, it’s probably preferable to take Social Security than to rely on high-interest credit cards or loans to make ends meet. And if health concerns or family medical history make it unlikely that a retiree will survive long enough to benefit from bigger payments, waiting isn’t advisable. But remember that Social Security benefits can be taxable, especially if your spouse is still working and you file taxes jointly. To figure out your potential liability, take half the benefits you get and add them to your other income. If the total is more than $25,000 for singles or $32,000 for joint filers, then some of your Social Security can be subject to income tax.
Are there rule changes I should know about?
One favorite trick of early filers, known as file-and-suspend, is no longer an option. Filing and suspending allowed you to file for benefits at full retirement age and then immediately suspend them. A spouse then received spousal benefits on your record while your benefits accrued value and the spouse’s own benefits were also delayed. This complex loophole was eliminated by the Bipartisan Budget Act of 2015. Another more recent change: an increase in the amount of money a worker younger than full retirement age can earn before he or she has Social Security benefits reduced. If you are collecting payments before full retirement age, you can earn up to $17,040 in other income. After that, $1 in benefits is withheld for every $2 earned above the limit.
Is Social Security healthy?
The Social Security trust fund has been running a surplus every year since 1982. In 2016, the program brought in $35 billion more than it paid out, according to the Social Security Trustees, and it now has some $2.85 trillion in reserves. But those annual surpluses are forecast to stop sometime in the next decade, as more Baby Boomers begin to claim benefits. That will eat into the reserves and tap the trust fund out by 2034—the year when today’s 51-year-olds reach full retirement age. That doesn’t mean Social Security checks will all of sudden come to a halt. But it’s projected that the program will have only enough revenue coming in to pay 77 percent of promised benefits. For someone expecting $2,000 a month, for instance, the payment could shrink to $1,540. Watchdogs say that making the program solvent for longer will require higher Social Security taxes, a slower growth in benefits, increasing the full retirement age—or all three. “Every year as a nation we do nothing,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Benefits have to be cut or revenue increased, because the system is not allowed to pay out money that it does not have.”