We commonly hear that you should WAIT as long as possible to take Social Security so you will receive a larger monthly benefit in the future. The short answer is that it depends. If you know how long you will live, then the answer is easy. There are several factors to consider on your decision of when to take Social Security.
- Financial situation
- Health and longevity
- Spouse’s benefits and age
- Taxes
- Earnings test and working
How Much Will My Social Security Be Reduced?
The short version: your social security will be reduced by 30% if you take at 62.
Long version: in the case of early retirement, a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.
For example, if the number of reduction months is 60 (the maximum number for retirement at 62 when normal retirement age is 67), then the benefit is reduced by 30 percent. This maximum reduction is calculated as 36 months times 5/9 of 1 percent plus 24 months times 5/12 of 1 percent.
What if I Delay my Social Security?
If you decide to delay past your full retirement age (FRA), then you will receive an 8% increase for every year after your FRA. Potentially increasing your benefit by 24% if you delay until age 70.
The Break-Even Point for Taking Early or Delaying
62 = $2,100
67 = $3,000
70 = $3,720
Let’s say you decide to take Social Security at age 67 which is $3,000/month. That would mean you would forgo your benefit at age 62 which is $2,100/month. You will have a lost opportunity cost to receive $126,000 over 5 years. The question is, when do you break-even on your decision to wait for $900/month more at age 67?
The break-even point would be around age 79. If you do not live past age 79 it would have been more beneficial to take Social Security earlier.
What if you decide to wait until age 70? The break-even age would be around age 82.
**None of these break-even figures are taking into consideration if you were to receive the Social Security and invest the funds. This scenario, would push the break-even point out even further.
Other Factors to Consider When Making a Decision
Break-even calculations can be helpful when making a decision on when to take Social Security. However, this should not be the only factor to be used when making a decision.
Your Financial Situation
Other factors to consider:
- Do you have a guaranteed pension? Does it provide a COLA?
- Do you have assets you can draw income from?
- Do you have long-term care insurance?
- Are you working full-time or part-time?
You may want to wait longer if you have other sources of income that will support you at the beginning of retirement that will allow you to delay taking Social Security until a later age.
Health and Longevity
Your health and family longevity should be considered when determining the optimal Social Security age. Is your health good and you have longevity in the family? If yes, you should probably wait longer to take Social Security. If your health is poor, you may want to take Social Security earlier to maximize the benefits you receive.
Spouse’s Benefit and Age
Are you married? Consider what your spouse’s benefits are. If you take earlier, then your spouse’s survivor benefits will be reduced to your spouse.
Taxes
Are you working and in a high tax bracket? Will you be in a lower tax bracket in retirement? You might want to delay taking Social Security to prevent being taxed at a higher rate.
Earnings Test and Working
Beware of the earnings test if you are working and have not reached your full retirement age (FRA). If you take Social Security before your FRA and exceed the income threshold, you could potentially receive none of the benefit and in some instances never recoup all the benefits SSA withheld.
If you are below your FRA, there is a $1 reduction for every $2 of earned income above $21,240. In the year a person is reaching their FRA, there is a $1 reduction for every $3 earned income above $56,520.
An easy rule: if you are working and earning above $21,000, then you should probably delay taking Social Security. Once you hit your FRA, then you no longer need to worry about the earnings test and can earn any amount above the limit.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
Preparing for a federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
