Social Security

The facts surrounding an important source of retirement income

When it comes to your retirement, you're likely to draw on a number of resources to help finance it. Common sources of retirement income include employer-sponsored 401(k) accounts, Individual Retirement Accounts (IRAs), pensions, annuities and more.

One of the most popular sources, however, is Social Security. Retirees become eligible for distributions at age 62, but the timing of when you choose to claim your benefits can drastically impact the amount of benefits you will receive, leaving many retirees to wonder, "When's the appropriate time to claim Social Security benefits?”

Understanding Social Security

As you near retirement, you will receive your Social Security benefit estimate-either in the mail or online. Your statement will show the amount of your expected monthly benefit if you start receiving benefits at your full retirement age (FRA), which is 66 for those born in 1943 through 1954. It will also show another figure, about 25 percent less, if you claim at the earliest possible date at age 62. Finally, you'll also see a third figure, about 32 percent higher than the FRA amount, if you delay receiving benefits until your 70th birthday1.

The amount of your benefit is based on the highest 35 years of income you've earned over the span of your career, adjusted to account for changes in wages from the year they were earned. The Social Security Administration then applies a formula to those figures to arrive at your specific benefit amount, also referred to as your primary insurance amount (PIA).

Factors that can influence your benefits
Even though your benefits are based on your own personal earnings, there are a few factors that can influence the size of your distribution. These include:

  • Claiming benefits before your FRA. As mentioned, you can claim benefits at any point after you reach age 62. However, if you claim benefits before your FRA, your PIA will be reduced.
  • Cost of living increases. Cost of living increases are added to your PIA beginning with the year you reach 62, regardless of when you actually claim your benefit.
  • Delaying retirement past your FRA. For each year beyond your FRA that you delay claiming benefits, your PIA will be increased.

When to claim
The swing between a 25 percent lesser PIA that you may receive for claiming early and a 32 percent gain in your PIA for waiting makes the age 70 PIA roughly 76 percent higher than the age 62 benefit amount.

If your FRA benefit is estimated to be $2,500 per month, for example, your age 62 benefit amount would be around $1,875, and waiting until age 70 would push the monthly benefit to $3,300.

The changing benefit amounts are not designed to punish or reward. Rather, Social Security's actuaries try to set benefits so that if you live out your life expectancy precisely, you'll receive approximately the same amount from the program whether you start benefits at age 62, age 70, or anywhere in between.

Clearly, one of the great unknowns when it comes to claiming Social Security is how long you will live in order to receive those benefits. It makes sense to delay claiming benefits only if you think you'll live long enough so that bigger benefits later will make up for foregoing receiving benefits earlier.

Strategies for claiming Social Security
There can be a potential advantage in waiting to claim benefits if you can afford to do so. The 8 percent per year delayed-retirement credit for waiting between ages 66 and 70 creates a return on investment. The higher benefits you earn will reduce your need to draw on assets later in retirement.

Married couples have an added incentive for at least the higher earner to wait to claim benefits. When one spouse dies, the survivor's Social Security benefit will be the higher of his or her own benefit or the benefit of the deceased spouse, including any delayed retirement credits. So, if the higher earning spouse delays to age 70 and dies first, the surviving spouse would step up to his or her benefit, including the 32 percent bonus delivered by the delayed retirement credit.

As you plan for income in retirement, be sure you understand the role Social Security will play. To discuss your plans for retirement in more detail, or for help understanding Social Security, contact me today.