There’s probably no decision more important for senior citizens than when to take their Social Security payout. Even though Social Security is only designed to replace about 40% of the average worker’s wages in retirement, statistics show that more than three out of five retirees today lean on the program for at least half of their monthly income. That makes your Social Security claiming decision all the more important.
As you may already know, Social Security dangles a pretty big carrot in front of eligible retirees if they’re willing to be patient. For every year a worker holds off on taking their payout, their benefit can grow by up to 8%, beginning at age 62 and ending at age 70. However, statistics show that a majority of people (about 60%) claim their benefit before age 65, thereby accepting a permanent reduction to their monthly payout. In other words, with the full retirement age — i.e., the age at which a worker is eligible to receive 100% of their monthly benefit, as determined by birth year — being age 66, 67, or some figure in between, for most Americans, very few are receiving at least 100% of their monthly benefit.
However, receiving 100% of your monthly benefit may not actually be the best thing about waiting until (or after) your full retirement age to begin taking your Social Security payout. Rather, the following three reasons provide even greater motivation to wait before taking your benefit.
1. No retirement earnings test hassle
Call it arbitrary, but I believe the absolute best reason to wait to take Social Security at your full retirement age, or even after, is that fact that you won’t have to deal with the hassles that come with the retirement earnings test.
The retirement earnings test allows the Social Security Administration (SSA) to withhold some, or all, of your benefits if you earn above set income thresholds and have not yet reached your full retirement age. It’s a penalty of sorts (I’ll describe what I mean by “of sorts” in a moment) for early filers.
For example, if you’ve already claimed your Social Security benefit but won’t reach your full retirement age in 2020, the SSA can withhold $1 in benefits for every $2 in earnings above $18,240 for the year (this works out to $1,520 per month). If you will reach your full retirement age in 2020 and have already begun taking your payout, the SSA can withhold $1 in benefits for every $3 in earned income above $48,600 ($4,050 per month) for the months prior to attaining your full retirement age. The point being that if you’re working and trying to double-dip with income from Social Security prior to hitting your full retirement age, your plan is probably going to backfire.
Now, the good news here is that early filers don’t lose their withheld benefits forever (this is why I said it’s a penalty “of sorts” above). The SSA returns withheld benefits in the form of a higher monthly payout once you hit your full retirement age.
2. You’ll be protecting your spouse
Another one of the best reasons to wait on taking your Social Security benefit until you’ve hit your full retirement age is that you’ll be giving your partner their best chance possible to maximize what they receive from Social Security.
Although we often think of Social Security as a very personal claiming decision, and there’s definitely truth to this given that it’s based on our work and earnings history, our decision of when to take benefits can help or hinder our loved ones. For instance, survivor benefits are tied to when a survivor begins receiving their payout, as well as when the deceased spouse began taking their payout.
As an example, if the income breadwinner of a household passes away first, the surviving spouse will have the option of taking whichever is higher: (1) their retired worker benefit or (2) the survivor benefit based on their deceased spouse’s earnings history. If the higher-income spouse waited until full retirement age before taking their payout, their spouse will have every option available to maximize their survivor payout (assuming it’s higher than their retired worker benefit). But if the deceased spouse made an early claim, it’ll adversely impact the maximum payout the surviving spouse can receive.
In essence, exercising patience when taking Social Security can help to financially protect the ones you love.
3. The data says so
A third reason why waiting until your full retirement age, or after, is a smart idea is because the data says it is. While I understand that choosing when to take Social Security is a bit of science and luck, especially since we (thankfully) don’t know our expiration date, the data shows that waiting is a smarter move far more often than not.
In June, United Income released a report, “The Retirement Solution Hiding in Plain Sight,” that examined the claiming decisions of approximately 2,000 households via the University of Michigan Health and Retirement Study. In particular, United Income compared the actual claiming age of seniors versus what would have been an optimal claiming decision — i.e., what age would have led to the collection of the most lifetime income from Social Security. What the report found was that only 6.5% of claimants would have made an optimal claiming decision by taking Social Security at ages 62, 63, 64, or 65. Comparatively, about 83% of claimants would have maximized their lifetime payouts by starting benefits at age 67, 68, 69, or 70.
Even though this is a relatively small study that only encompasses around 2,000 senior households, it’s certainly believable given that longevity has steadily increased over the decades. With Americans living longer, a later claim will help to ensure they’re getting as much as possible from the Social Security program.
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