Taking Social Security Benefits Early Or Late: The Great Debate?


For many people nearing retirement, Social Security is a topic at the forefront of any thoughts or discussions related to this chapter in their lives. Many retirees see Social Security income as something that should be taken immediately because of the hard work and taxes paid into the system throughout their careers. However, we believe that each individual or couple should take a careful approach in assessing when to take these benefits in order to yield the most favorable outcome from the program and increase the likelihood of achieving their financial goals.


Currently the earliest retirement age that someone can begin to receive Social Security benefits is 62. In fact, according to a recent May 2014 article by Forbes, 32 percent of eligible men and 38 percent of eligible women born in 1946 applied for Social Security early at the age of 62. While this will guarantee you receive benefits for the longest period of time, doing so effectively locks you into the lowest monthly payments for life. The Full Retirement Age for those born between 1943 and 1954 is 66, and this age is scaled up to 67 for anyone born in 1960 or later. Full retirement refers to the age when you’re eligible to receive full retirement benefits. However, the longest you should wait to start taking benefits is age 70.


Taking benefits at the age of 62 can work for someone who needs the funds immediately. Millions of Americans, especially those who have saved very little or nothing at all, do need the money. This decision does not come without a risk. Your benefits are reduced by a percentage each month that you begin taking benefits before the Full Retirement Age. For example, someone with a Full Retirement Age of 66 that starts taking benefits at age 62 would have his or her monthly benefits reduced permanently by 25% (Please see Appendix 1 for calculation). Thus by taking social security “early” at the age of 62, you are foregoing a progressively higher annual benefit (through age 70) to be received over the course of your lifetime.


Taxation and income are other factors to consider when choosing when to begin taking benefits. Are you and your spouse still earning income as you reach these retirement ages? If you take Social Security benefits before your Full Retirement Age, $1 in benefits will be deducted for every $2 you earn above the annual limit ($15,480 in 2014). In the year you reach Full Retirement Age this amount changes to $1 in benefits for every $3 above a higher limit ($41,400 in 2014). However, the month you hit Full Retirement Age, benefits are no longer reduced regardless of income. So for someone born between 1943 and 1954, they would not be penalized for earning greater levels of income once they reach 66. Another factor you and your spouse need to be aware of is whether or not your Social Security benefits will be subject to federal taxation. This usually happens when you have other substantial income (i.e. wages, interest, self-employment, dividends, IRA distributions or other taxable income) in addition to your benefits. There is a detailed calculation that the IRS uses called provisional income to determine the percentage of taxability of your benefits. For purposes of clarity and ease of explanation, in this article I will just refer to the combined spousal income limits, listed by the Social Security Administration, that determine taxability. For spouses filing a joint return, if you have a combined income of $32,000-$44,000 you may have to pay tax on up to 50% of your benefits. Any couple reporting income in excess of $44,000 will have to pay taxes on up to 85% of the benefits regardless of age.


After reaching Full Retirement Age, you are credited for delaying the start of your initial retirement benefits. For every year you wait to take Social Security benefits, you get an additional 8% credit per year in excess of the amount you would have received at your Full Retirement Age. This also positively affects the amount your spouse receives in survivor benefits after you pass. If you are someone with a Full Retirement Age of 66 that delays taking Social Security benefits until age 70, you would receive a 32% greater annual benefit than had you started taking benefits at Full Retirement Age. Note, you will file to begin receiving benefits at no later than 70 in all scenarios because there is currently no additional benefit for waiting to file after the age of 70.


There are many different strategies unique to each family’s situation we believe can help maximize your retirement benefits. For example, if both spouses are in good health, can reasonably expect to meet or exceed normal life expectancy, and can financially afford to wait, then a file and suspend strategy may work. This strategy involves the higher earning spouse waiting as long as he or she can before taking benefits. When the higher earning spouse files, he or she suspends benefits until age 70 to continue accruing retirement credits (which are based on artificially high interest rate and mortality assumptions). The lower earning spouse can fill out a restricted application to begin receiving spousal benefits. Keep in mind that you are only allowed to receive spousal benefits if you have not opened up a record on your own benefits. Filling out a restricted application simply means you are not taking your own benefit, which still makes you eligible for spousal benefits. For example, take a husband and a wife both born in June of 1950. For purposes of this example, let’s say the husband is the highest earning spouse. Both the husband and the wife would reach Full Retirement Age in June of 2016. At that time the husband would file and suspend benefits until age 70 (June 2020). The wife, being the lowest earning spouse, would fill out a restricted application and simultaneously apply for spousal benefits on her husband’s record until she reaches age 70, at which point she would file and start to receive her own benefits that have been delayed and appreciated 8% each year. Once the husband reaches the age of 70 in June 2020, he would start taking his own benefits that have grown at the 8% credit per year over Full Retirement Age. Delaying the start of both spouses’ retirement benefits to age 70 also positively impacts the survivor benefits each spouse would receive after the first spouse passes away.


Each family’s scenario is different and there are many other outside factors to consider when it comes to receiving Social Security benefits. Ultimately, you should consider cash needs, health, taxes, employment status, and life expectancy for you and your spouse. The fact remains that over one-third of the population decides to take Social Security at the age of 62. The bottom line is that if you and your spouse are in good health, it may be best to wait as long as you can to start taking benefits so as to maximize your benefits and any survivor benefits received over time. This topic of taking Social Security benefits can be a complex one, but your advisors at Lutz Financial are here to help you make the best decision that maximizes your income, builds your nest egg, and helps you to fulfill your retirement goals.


Appendix 1

If you choose to start receiving Social Security before your Normal Retirement Age (currently 66), your benefit is reduced by 5/9 of 1% for each month before the full retirement age, up to 36 months. If you start taking benefits more than 36 months before your Normal Retirement Age, the benefit is further reduced by 5/12 of 1%. For the first 3 years (36 months) the benefits are reduced by 5/9(1%) x 36 months, which equals 20%. Because you took the benefits at age 62, the monthly benefits you receive if further reduced by 5/12(1%) x 12 months, or 5%. This creates a permanent monthly benefit for you that is 25% less per month than receiving benefits at the Full Retirement Age!



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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.





Nick Hall is an Investment Adviser at Lutz Financial. With 10+ years of relevant experience, he specializes in creating thorough, adaptive financial plans and investment management strategies for high net-worth families. He lives in Omaha, NE, with his wife Kiley, and daughter Amelia.

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