When to Take Social Security (vanguard)

Taking Social Security: Sooner might not be better
April 24, 2012

The thought of receiving Social Security benefits early can be enticing. If you can start getting payments as soon as age 62, why wait until you reach full retirement age at 66 or 67?

The answer is simple: Waiting could mean putting more money in your pocket over the long term. If you start collecting Social Security before full retirement, you could get less each month than if you wait just a few years.

How much less will you get?
The amount of the reduction depends on how many months before your full retirement age you start taking benefits. The earlier you start, the bigger the cut.

Your birth year determines your full retirement age. If you were born between 1943 and 1954, it's age 66—increasing incrementally until it reaches the maximum age of 67 for people born in 1960 and after.

For more information
Visit ssa.gov or call the Social Security Administration at 800-772-1213.

According to the Social Security Administration, older baby boomers who started taking benefits at age 62 will see a lifelong reduction of 25% in monthly payments compared with what they would have gotten by waiting until full retirement age. The percentage increases to 30% if your birth year is after 1959. Spouses also will see at least a 30% drop in the benefit amount they receive, and those born after 1959 face a 35% drop.

While you can collect benefits before full retirement age and continue working, you might get hit with an earned-income penalty. The Social Security Administration deducts $1 from your payments for every $2 you earn above an income threshold ($14,640 for 2012). The year you reach full retirement age, the deduction changes to $1 for every $3 you earn (up to $38,880 in 2012) until you reach your birth month—after that, the earned-income penalty no longer applies.

Your actual benefit amount is based on the income you earned during your working life. If you're under age 60, you won't get an earned income estimate from Social Security mailed to you; however, you can check this information—and confirm it's correct—at ssa.gov.

Consider waiting to file for benefits
Given the downsides of taking benefits early, you may want to think about waiting until you reach your full retirement age, suggests John Ameriks of Vanguard Investment Counseling & Research.

"If you don't have an immediate need for Social Security, it may be best to delay taking the benefit," Mr. Ameriks said.

For example, if you were born in 1946 and put off taking benefits until age 70 (in 2016), you'd see a 32% increase in monthly payment amounts over what you would have received by starting this year. That's because you get an increase (two-thirds of 1%) for each month you delay beyond full retirement age.

Monthly payment by age you choose to receive benefits


The sample benefits used in this chart are based on Social Security Administration estimates for a person who qualifies to receive a starting monthly benefit payment of $1,000 at the full retirement age of 66. All amounts are in today's dollars and don't include potential earnings from reinvestment. Actual income will include any increases in benefits based on inflation.

Of course, if you need to take Social Security to help meet your current spending needs, you should feel free to do so, Mr. Ameriks added. And because there's no advantage to waiting past age 70 to apply for benefits, don't hold out any longer than that.

A method to maximize benefits when you're married
If your spouse also qualifies to receive benefits based on his or her employment history, there's a strategy generally called restricted application that could help you maximize how much your household gets from Social Security.

Here's how it works: The lower-earning spouse applies for benefits at age 62 and receives the reduced amount. The higher-earning spouse files for spousal benefits only at age 66, collecting half of the lower-earning spouse's full benefit while postponing his or her own full benefits until age 70—so that they'll continue to increase.

While the dollar amounts will vary based on your situation, here's an example: The lower-earning spouse qualifies for a $1,000 full benefit but takes a lower benefit of $750 at age 62. The higher-earning spouse gets $500 when filing for spousal benefits only. The addition of the spousal benefit can give you $6,000 more in Social Security income each year.

Another advantage of this method: The lower-earning spouse will get a higher survivor benefit if he or she survives the higher earner.

It's a good idea to discuss any approach with a financial advisor.

Plan for a longer life expectancy

Your expected longevity is another important factor to consider in this decision, Mr. Ameriks said. Americans' life expectancy is on the rise, with a quarter of today's 65-year-olds projected to live past age 90—and 1 out of 10 to live past age 95—according to the Social Security Administration.

Of course, you can't predict exactly how long you'll live, but your health status and family history can give an indication. If you're concerned your life span will be shorter, you may want to start collecting benefits at age 62. Your monthly payments will be reduced, but you could receive a higher lifetime amount because you started taking benefits sooner.

However, if you expect to be one of those longer-living people—or you're concerned about the risk of outliving your assets—you might consider waiting to receive benefits until age 70 to boost your future monthly payments.

No matter when you decide to start receiving Social Security benefits, it's helpful to consider—before you need to act—how your timing could affect your long-term financial situation.