Deciding when to take Social Security is a key decision in your retirement planning. And while you’ve probably read some “rules of thumb” about claiming your benefits, the truth is that the best time to take Social Security depends on your unique circumstances.
Here are four things we analyze when helping our clients plan for Social Security benefits.
1. How long can you afford to wait?
“Wait as long as you can” is probably the most common piece of advice surrounding Social Security benefits. That’s because, while you can start taking Social Security at age 62, the Social Security Administration uses this table to determine the age at which you are eligible for full retirement benefits. And if you delay your Social Security at full retirement, the size of your monthly benefits will continue to increase until you reach age 70.
But what if you’re dealing with a chronic health issue that could impact your longevity? Or, what if taking your benefits early is the difference between making ends meet comfortably and having to downsize into a smaller house?
Sure, the longer you wait to take Social Security the bigger your benefit will be. But there could be situations where smaller benefits will be more beneficial earlier in your retirement.
2. What’s your marital status?
Married couples have several factors they need to consider before either person takes Social Security.
First, compare your individual benefit estimates. If one spouse’s projected benefits are significantly higher, it might be a good idea for only the lower-earning spouse to claim benefits and let the higher benefits continue to grow.
However, if one person earns more than double their spouse’s income, the lower-earning spouse can take a spousal benefit equal to 50% of the high earner’s benefit.
Divorced people over the age of 62 who were married for at least 10 years might also be eligible to receive Social Security benefits based on their ex-spouse’s earnings record.
3. What will be the tax implications?
Your Social Security benefits could be subject to taxation based on your combined income, which is the sum of your adjusted gross income, your non-taxable interest payments, and half of your Social Security benefit. Individuals who earn between $25,000 and $34,000 in combined income in retirement may have to pay tax on up to 50% of their Social Security benefits. Folks who earn more than $34,000 may have to pay taxes on up to 85% of their benefits. The 50% threshold for married couples filing jointly is between $32,000 and $44,000, and the 85% threshold is above $44,000.
One increasingly common situation where these figures come into play is retirees working part time. Many seniors who want to keep cashing those paychecks are better off delaying their Social Security benefits so that their combined income doesn’t get too high. Once those retirees stop working for good, they can claim higher benefits without an added tax burden.
4. What is your risk tolerance?
Whenever you decide to take your benefits, your monthly Social Security check will be a risk-free payment that’s adjusted for inflation annually. For some folks who are a little skittish about market investment, knowing that check is waiting for them provides a little extra stability and peace of mind around their overall portfolio.
However, folks with a considerably low risk tolerance might be tempted to grab their Social Security benefits as soon as they’re eligible. They could be so concerned about dying before they collect their benefits or so hesitant to take distributions from their retirement accounts that they fail to consider all the consequences.
Our Life-Centered Planning process can help you avoid these kinds of mistakes. If you have questions about the best time to take Social Security, schedule a call with us and we’ll work out a plan to get the most from your benefits.