Courtesy of Bob Williams:

“When should I begin to take Social Security?”  That is one of the most frequently asked questions by those on final approach to retirement.  It’s not uncommon to hear people say, “I’ve paid into Social Security for years.  I’m going to take it at 62 and get what’s mine!”  To be sure, that’s an understandable sentiment although not necessarily the best decision.  The breakeven point between taking Social Security at 62 and waiting until full retirement age (FRA) is 76 years and 11 months—die before that age and you should have taken Social Security early—die after that and you should have waited.  According to the Social Security website a man reaching 65 today is expected to live to age 82 and a woman reaching 65 today is expected to live until 85.  For married couples who are 65 years old today there is a 50% chance that one of them will live to be at least 90.  But those are averages and as we all know, the date of our demise is a secret!

There are several factors to consider when deciding when to begin taking Social Security.

Age

62 is the earliest age you can begin drawing a monthly Social Security retirement check.    However, if you choose to begin receiving benefits at 62 rather than your full retirement age (FRA) you will receive reduced benefits.  The decision to take reduced benefits may also affect the amount your spouse receives from Social Security if your spouse’s Social Security check is based on your work history rather than theirs.  The chart below shows how much less the benefit will be for you and your spouse if you begin to receive benefits at age 62.

Primary and spousal benefits at age 62
(benefits based on a $1,000 primary insurance amount)

Year of
birth
 a

Normal (or full)
retirement
age

Number of
reduction
months
 b

Primary

Spouse

Amount

Percent
reduction
 c

Amount

Percent
reduction
 d

1937 or earlier

65

36

$800

20.00%

$375

25.00%

1938

65 and 2 months

38

791

20.83%

370

25.83%

1939

65 and 4 months

40

783

21.67%

366

26.67%

1940

65 and 6 months

42

775

22.50%

362

27.50%

1941

65 and 8 months

44

766

23.33%

358

28.33%

1942

65 and 10 months

46

758

24.17%

354

29.17%

1943-1954

66

48

750

25.00%

350

30.00%

1955

66 and 2 months

50

741

25.83%

345

30.83%

1956

66 and 4 months

52

733

26.67%

341

31.67%

1957

66 and 6 months

54

725

27.50%

337

32.50%

1958

66 and 8 months

56

716

28.33%

333

33.33%

1959

66 and 10 months

58

708

29.17%

329

34.17%

1960 and later

67

60

700

30.00%

325

35.00%

 

a If you are born on January 1, use the prior year of birth.
b Applies only if you are born on the 2nd of the month; otherwise the number of reduction months is one less than the number shown.
c Reduction applied to primary insurance amount ($1,000 in this example). The percentage reduction is 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month.
d Reduction applied to $500, which is 50% of the primary insurance amount in this example. The percentage reduction is 25/36 of 1% per month for the first 36 months and 5/12 of 1% for each additional month.  (Chart courtesy of http://www.ssa.gov/oact/quickcalc/earlyretire.html)

 

More Money If I Wait

While it may be appealing to receive a Social Security check beginning at age 62, keep in mind that you may be leaving money on the table by taking early, reduced benefits.  Yes, you will receive a larger check if you wait until FRA, but for every year that you wait to begin receiving benefits past your FRA the amount of Social Security you receive will increase by 8% each year until you reach the age of 70.  After age 70 your Social Security benefits plateau and there is no additional advantage for you to wait any longer.

Will I Continue To Work

Another consideration about when to draw Social Security is whether you will continue to work after you retire from your current job and how much income you will receive from that post-retirement employment.  For 2013 if you are under your FRA you can earn $15,120 with no reduction of your SS benefit.  But if you are under full retirement age for the entire year and you earn more than $15,120 then Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit.  So, if you earn $10,000 more than the annual allowable income, Social Security will deduct $5,000 from your social security benefits.  Once you reach FRA you can earn all the income you want and your Social Security benefits will not be reduced.  There are other formulas about how much will be taken back if you are under FRA for less than a full calendar year.  Details about all the formulas for taking back your social security due to earned retirement income can be found at www.ssa.gov/pubs/10069.  The publication is called How Work Affects Your Benefits.

Taxation of Benefits

While not necessarily a consideration in whether to take Social Security benefits early, you must still contemplate the taxes you will pay.  Taxation of Social Security benefits usually happens only if you have other substantial income such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return in addition to your Social Security benefits.

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service rules if you:

  • file a federal tax return as an “individual” and your combined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return and you and your spouse have a combined income* that is
    • between $32,000 and $44,000, you may have to pay income tax up to 50 percent of your benefits.
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.

Note:

Your adjusted gross income

+Nontaxable interest

+ ½ of your Social Security benefits

_________________________________

= Your “combined income

Each January you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year.  You can use this statement when completing your federal income tax to find out if your benefits are subject to tax.

There are lots of moving parts to deciding when to begin taking Social Security benefits.  It’s a good idea to consult with people who are familiar with the system before you make your decision.  You don’t want to leave money on the table.