Securing Your Retirement: Deciding When to Claim Social Security Benefits
One of the many complex decisions you’ll face as you approach retirement is when to claim Social Security benefits. This decision can have a significant impact on your financial well-being in retirement.
There are several factors to consider when making this decision, including your current financial situation, projected retirement expenses, health and life expectancy, and other sources of retirement income.
Understanding the different types of benefits
Worker Benefits – A worker who is eligible for retirement benefits is entitled to the primary insurance amount (PIA) at full retirement age. However, benefits may be taken at a reduced amount as early as age 62. Your full retirement age depends on the year you were born, and the benefit amount is based on a formula that considers how much you have paid into the system during your working years. Cost of living adjustments apply from age 62 on.
If you wait to claim your benefits, Social Security financially rewards you with delayed retirement credits. You can earn deferral credits (increase in benefits) when deferring past full retirement age. The deferral credits amount to about an 8% increase in benefits for each year you delay claiming. There are no additional deferral credits past age 70.
If you happen to claim too early, there are a couple of options that may help get you back on track.
Spousal Benefits – This benefit is available to spouses and qualified ex-spouses of a worker who claims retirement benefits. At full retirement age, the spousal benefit is worth 50 percent of the worker’s primary insurance amount (PIA). Under current law, one must claim worker benefits before their spouse can claim spousal benefits.
Survivor Benefits – Survivor benefits are usually paid to a surviving spouse (although other dependent family members may be eligible as well). The spouse is entitled to 100 percent of the benefit the deceased worker was collecting or was entitled to collect at the time of death if the deceased had not yet claimed benefits. The full benefit is only available at full retirement age. However, benefits are payable as early as age 60 at a reduced amount. There are other exceptions for dependent children under 16 or a disabled surviving spouse.
Planning note: Although it is possible to be eligible for different types of benefits at the same time, Social Security will pay only one type of benefit at a time. Therefore, it is important to know about the different types of benefits, when you may be eligible, and how they are calculated to create an optimal claiming strategy. Depending on your circumstances, claiming one benefit type early and later switching to a different type may provide the most benefits.
Many people may not realize that if their provisional income exceeds certain thresholds, their benefits may be taxable. Provisional income is equal to adjusted gross income (AGI), plus one-half of Social Security income, plus other nontaxable income. Under current law, up to 85% of benefits can be taxed when provisional income exceeds $34,000 for a single filer or $44,000 for married filing joint filers.
Choosing an optimal claiming strategy requires a comprehensive planning approach that fits within the context of your financial situation. There is no one-size-fits-all solution when it comes to discerning your claiming age. Everyone’s situation is different and the timing of claiming Social Security should be determined based on many unique factors. Some of these factors include continued employment, health, marital status, wealth/net worth/sources of income outside of Social Security, personal risk tolerance, financial reliance on Social Security, age disparity between spouses, earnings disparity between spouses, work in noncovered employment, divorce, and federal income taxation of benefits.
Joshua J. Podczervinski
Investment Advisor Representative
CFP®, RICP®, CPA