How to Know When to Take Social Security

For those wondering when to take Social Security retirement benefits, having the funds sooner rather than later sounds nice. Still, does it really work in your favor? The answer depends on a few factors. It depends on whether you plan to work between age 62 and your full retirement age. Your life expectancy and marital status are also taken into account. Plus, our desire to protect your purchasing power should you live longer than you might expect has an effect.

Below you can see how each of the four factors might affect your individual situation, as well as examples with sample numbers to help you decide.

Earned Income Before Age 66 or 67

The Social Security Administration (SSA) defines your full retirement age as the day you are able to start collecting benefits. It depends on the day you were born, and for most people ends up being about age 66 or 67. But you're allowed to retire, as the SSA defines it, as early as age 62. If you reach this age and you are still working, you may wish to start receiving your benefits right away, but this doesn't always make the most sense in the long run.

Why? Because if you earn over the earnings limit, your benefits will be reduced. The SSA uses your own income to figure out how much they should pay each month. They assume you don't need the full amount if you're making money. But once you reach full retirement age, your benefit each month will stay the same, whether or not you have any other sources of income.

Life Expectancy

As with the age you plan to retire, the SSA also has norms set up for how long you might live. The standard ages for men and women have risen over time to account for better health and longer lives, from about age 60 in 1930, to roughly 80 today. If you live to your standard life expectancy, odd as it may seem, you will get almost the same amount whether you take Social Security early or wait until later to take it. To see how this works, it helps to look at an example using real numbers.

Suppose George is age 61 and thinking about when to start the benefit. Here are the numbers from his Social Security statement showing how much he will receive at which age:

• Age 62: $1,643 ($19,716 per year)
• Age 66: $2,238 ($26,856 per year)
• Age 70: $3,009 ($36,108 per year)

A man who is 62 years old has a life expectancy of twenty more years, or to age 82, per the SSA's tables. As a side note, the SSA adjusts for the cost of living, which provides an increase in the amount on your benefit check over the years, but for now, to keep things simple, we'll put his piece on hold. Let's look at three options:

• Assume George starts getting his monthly benefit check at 62. He gets $1,643 per month, or $19,716 per year, for 20 years. He receives a total of $394,320.
• If he waits until age 66, he gets $2,238 per month, or $26,856 per year, for 16 years (to age 82). He receives a total of $429,696.
• If he waits until age 70, he gets $3,009 per month, or $36,108 per year, for 12 years (to age 82). He receives a total of $433,296.

In sum:

• He'll receive $394,320 if he starts benefits at age 62.
• He'll receive $429,696 if he starts benefits at age 66.
• He'll receive $433,296 if he starts benefits at age 70.

If George lives to the age of 82, he collects the maximum amount of income over his life by choosing to take benefits at his full retirement age, or at age 70 in his case.

Bringing Cost of Living into the Equation

When you factor in the cost of living adjustment that SSA provides, there's even a stronger case for George to wait. The SSA reasons that costs of living rise by 2% each year, and they reflect this as an increase in the monthly benefit checks.

So with this added bonus, George can expect the more true figures to be as follows:

• $479,047 if he starts benefits at age 62.
• $541,840 if he starts benefits at age 66.
• $567,416 if he starts benefits at age 70.

If George lives to age 82, he will collect the maximum amount of income over his full life by waiting until age 70 to begin taking his benefits. In George's case, his breakeven age is 80. This means that if he waits until age 70 to collect, he must live to at least age 80 to receive the same total dollars he would have received if he started taking benefits earlier.

As you can see, there is a lot of money at stake. And, no one knows how long they'll live with any certainty. But you can still make a solid choice about when to receive your Social Security benefit by weighing the many outcomes, as George did.

Marital Status

For single people, life expectancy is the factor that has the most impact on future payouts. A breakeven analysis based on how long you live can be a good starting place for singles who are trying to decide when to start taking the benefit. You should also be aware of how your choice will affect your taxes in any given year.

For married couples, Social Security is not as simple. When you are married, you have to think about survivor benefits as well. The way this works is, upon the death of the first spouse, the living spouse can keep the larger of either their own benefit or their spouse's. There are many ways for couples to arrange how and when they each take benefits so they can get more as a couple.

Desire to Protect Purchasing Power

Most people want to collect their Social Security benefits as soon as they are able, which is at age 62. But too often, they make this choice without knowing how it might affect them in the future. They don't take into account the extra income that might come from delaying their start date by even a few years. If you live well into your 80s, you could be giving up $50,000 to $150,000 in extra income by making a hasty choice about when to collect.

This is worth thinking about in the context of those golden years. Later in life, you may have costs that you don't have now. Health care becomes more costly for many people, or you may have new hobbies to support. Perhaps you'd like to travel more. Also, you'll be living off of a monthly Social Security check, and maybe from a fund you set up many years ago.

Your golden years are not the time you want to be strapped for cash. So before taking any action with the SSA, think about how your choice of when to collect benefits might impact your budget for the rest of your life. Delaying your start date may protect your income. It may also provide you with a great deal of purchasing power later in life.