Deciding when to claim your Social Security benefits can be intimidating and confusing. While waiting for benefits will increase your future monthly payments, some individuals may need or want to access benefits sooner. To help you better navigate this decision, we’re examining the variables that could impact when you claim your Social Security benefits.
Should You Delay Social Security Benefits?
Social Security benefits become accessible at age 62, but full retirement benefits will only be available once you reach your full retirement age, determined by your birth date.1 Any benefits received before reaching your full retirement age are reduced by a percentage, also determined by birth date, ranging between 25% and 30%.2 This reduction is typically permanent. So, if you were to access benefits at 62, the percentage taken off of Social Security would remain, even after reaching full retirement age.3
On the other hand, if you were to wait longer than the full retirement age to access Social Security benefits, you would receive a retirement credit. The credit would be a bonus percentage determined by how long you wait up to age 70.4
Social Security and Taxes
Your Social Security benefits can be taxed; this may happen if the total of half your Social Security benefits plus any additional income is greater than the IRS’s base amount for your tax filing status.5
The current base amounts are:
- Single or Head of Household: $25,000
- Married Filing Jointly: $32,000
- Married Filing Separately and live apart for the entire year: $25,000
- Married Filing Separately and live together at any point during the year: $0
It’s important to note that all taxable income earned by both spouses must be counted for couples filing jointly—even if one spouse does not yet receive Social Security benefits.
Receiving your Social Security benefits before your full retirement age may benefit those with severe health conditions or a very short life expectancy. This option provides retirees with a steady source of income earlier, which could also help those who are no longer working and who lack other income sources in retirement.
Alternatively, suppose you or your spouse have a family history of longevity and face few health problems. You may benefit from holding off on collecting Social Security benefits until age 70 to receive the maximum monthly payment.
The benefits of waiting are clear. But for some, it is tempting to start taking Social Security payments early so that you can either invest the income or take out less from your savings.
It is true that for some, investing Social Security income can bring a better return, as long as the investment profits outweigh the income loss from accessing Social Security early.
However, additional returns rarely outweigh the safety the larger benefit provides. That said, if you an extremely confident that you will never run out of money and are concerned primarily with leaving a legacy, you may want to consider this.
This can be a risky strategy, so if this is something you are considering, you’ll want to work with your financial planner or investment advisor first to determine if this option is right for you.
Working and Social Security Benefits
While you can continue to work after you begin collecting Social Security, and your benefit may continue to increase if you do so, remember to consider tax implications, as a higher income may bring greater tax liability. Working longer can increase the total amount you receive in Social Security benefits, but we recommend consulting with your advisor on your tax strategy.
As you may have heard, your monthly benefits could be reduced if you work and collect benefits before your full retirement age. However, the months you receive a reduced amount are calculated back into your benefits once you reach full retirement age.6 Still, if your goal was to have additional income for a few years, your plan may make your life more complicated without much benefit.
Considering these factors, deciding when to receive Social Security benefits will depend on your financial circumstances. In many situations, it is best for both spouses to delay until age 70, but that is not universally true. For the best guidance, work with your financial advisor to examine your options and determine the best course of action.
Are the complexities of Social Security causing you stress? Schedule a free phone consultation with us today.
This content is developed from sources believed to be providing accurate information and is provided at least in part by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Original content of Practical Financial Planning, Inc. only is copyright © 2021by Practical Financial Planning, Inc.