Jan 15, 2015|Cliff Goldstein, MarketWatch
If you’re nearing retirement, you’ll likely be faced with a decision: Should you start taking Social Security at the earliest age possible, 62, wait until you reach your full retirement age (65 to 67, depending on the year you were born), or hold out until age 70 to get the most benefits?
There is really no one-size-fits-all answer to this question. Determining the best age to take Social Security ultimately depends on your income needs, life expectancy, and your ability and desire to continuing working. It also hinges on your overall health, the amount you have accumulated in retirement savings and your family’s financial picture.
Social Security: When delaying makes sense
The earliest age you can start receiving Social Security benefits is 62, but it’s generally a good idea to wait until at least your full retirement age or until 70, if you’re able to. Benefits are reduced if you take Social Security before your full retirement age, so the longer you wait, the greater your benefits.
For example, if your full retirement age is 66 and two months, but you start getting benefits at 62, you’ll get only 74.2% of the monthly benefit since you’re getting benefits for an additional 50 months. But if you start at your full retirement age, you’ll get 100% of the monthly benefit, according to Social Security.
Waiting until age 70 yields even greater benefits, as it means a 76% increase in benefits from what you would have received had you filed at 62.
For example, if you were born on Jan. 1, 1950, earn $40,000 this year and plan on retiring in January 2020 at the age of 70, you’ll receive $1,702 in monthly benefits, according to the Social Security Quick Calculator. But if you elect to receive benefits five years earlier in January 2015, your monthly benefit will be $1,129, or $573 less, according to the calculator.
“Generally speaking, for every year you delay taking Social Security, it increases your benefit by around 8%,” says Allan Moskowitz , a financial planner with Progressive Wealth Management. “It is generally best to wait until you are 70 if you are in good health, have other sources of income and don’t need it.”
You should still file and suspend benefits as soon as you’re eligible, even if you don’t think you’ll need it, Moskowitz says. “That way, if something happens to you and you do need it before reaching age 70, then you can collect part of it retroactively,” he explains.
“Unless you have good reason to believe you have a shorter than average life expectancy, and assuming you have other income sources to tap into, delaying your Social Security is prudent and maximizes its value as longevity insurance, given that this income is guaranteed for life and cannot be outlived,” says Joseph Alfonso, a financial planner with Aegis Financial Advisory LLC.
Also, collecting benefits while earning income from work can increase your marginal income tax bracket, says Mark Smith, president of Vision Wealth Planning, LLC. “Delaying the benefit until there are no earnings from work can therefore provide a tax benefit,” he notes.
When delaying doesn’t make sense
However, waiting until age 70 to receive Social Security is just not an option for some, due to smaller retirement savings, an inability to work past age 62, high health care costs or an overall higher cost of living. A lower life expectancy, in some cases, and your spouse’s income level can also play a role in your decision.
When it comes to couples, it may be appropriate for the higher earner to delay his or her benefit to age 70 if possible, given that this will ensure a maximized survivor benefit since the benefit is based on your total earnings, Alfonso says.
“Given the high likelihood that at least one spouse will live well into their 80s, delaying makes sense for couples even if the higher earner has a shortened life expectancy,” he says.
It can also make sense for divorced or surviving spouses to delay their own benefit until age 70, since they can claim either a divorced spouse benefit or a surviving spouse benefit now, while their own benefit continues to grow to age 70, Alfonso says.
The bottom line is the decision on when to take Social Security depends on numerous personal factors.
If you need the money sooner to cover health-care costs and living expenses, and you have a small retirement nest egg and a lower life expectancy, taking Social Security earlier makes sense.
But if you are healthy, can work longer and have other sources of retirement income, delaying Social Security until age 70 is the better choice since your benefits will be greater.