According to the Alliance for Lifetime Income,1 approximately 11,000 baby boomers are retiring every day. If you’re approaching or already in retirement, one of the biggest questions you may face is whether you have enough to live comfortably. As more people retire each year, decisions around when to claim Social Security continue to come into focus. At the same time, potential changes – such as projected reduction in benefits of just over 20% if the Social Security Trust Fund is depleted by 20334 – raise important considerations for your retirement strategy.
Social Security (SS) was originally created to help provide support for the impoverished and was never intended to be the sole income source for retirees. However, many retirees rely on SS exclusively for their retirement income. According to a 2022 Census Bureau’s Survey of Income and Program Participation (SIPP), Social Security accounted for at least 50% of income for many recipients.2 As you think about your own retirement, an important question is when to begin claiming benefits. To qualify for SS benefits, you must have worked and paid into SS for at least 40 quarters, or 10 years. Once eligible, the Social Security Administration determines your monthly benefit, which is paid for the rest of your life.
Your Social Security benefit is based on your highest 35 years of earnings, which determines your Primary Insurance Amount (PIA). This is the amount you would receive at your Full Retirement Age (FRA). Your FRA depends on your year of birth: age 66 for those born between 1943 and 1954, gradually increasing to just over 66 for those born between 1955 and 1959, and age 67 for those born in 1960 or later.
Once you’ve met the eligibility requirements, you can choose to begin receiving reduced benefits as early as age 62 (earlier if disabled or a survivor of a beneficiary), claim your full benefit at Full Retirement Age, or delay benefits until age 70 to receive a higher monthly amount. The key question becomes: how does the timing of your decision impact your overall retirement income?
Claiming Social Security benefits prior to your FRA can reduce your benefits by as much as 30%, depending on your year of birth. For example, let’s say you were born in 1960 or later, and your normal Full Retirement Age benefit at age 67 is $1,000 per month. If you choose to take your benefits as soon as possible at age 62, your benefit would be reduced to only $700 per month. If you decide to wait until age 70, there is an 8% increase applied to your SS benefits for each year that you wait past your FRA. So, in this example, if you wait until age 70, your $1,000 normal primary insurance amount would grow to $1,240 per month.
You may be wondering why you would ever claim Social Security benefits early if waiting until age 70 could increase your benefit by as much as 24%. While delaying benefits can result in a higher total payout – especially if you live past the breakeven age (typically between 75 and 82, depending on when you file and other factors3) – that’s only part of the picture. Many online SS calculators focus solely on maximizing benefits, without considering the full context of your financial plan. They often overlook factors such as your investment accounts, tax implications, retirement timing, and how you draw income from your portfolios.
This gap can lead you to believe that delaying Social Security until age 70 is often the best choice – but that’s not necessarily the case. Working with a financial advisor allows you to evaluate your full retirement plan and model different scenarios, helping you understand the impact of claiming benefits at various points in time.
For example, if you retire early at age 62 and choose to delay SS until age 70, you would need to rely on your investment portfolio to support your retirement income needs until SS kicks in eight years later. While Social Security benefits would be higher at age 70 compared to claiming at age 62, delaying benefits could require you to draw down your portfolio during that time – potentially placing significant strain on your assets. This can cause a plan that seemed right (waiting until 70 to take SS) to be less successful while risking having fewer assets in the end. As mentioned earlier, many Social Security calculators do not account for the tax implications of withdrawing from other assets while you wait to claim benefits. The impact that taxes have on your overall withdrawals from your portfolio can make delaying SS less attractive than it may first appear. One of the most important questions to consider before filing for benefits is whether you have enough money to support your retirement income needs if you choose to delay claiming benefits.
Source: Morningstar
The hypothetical performance returns or other information regarding various investment allocations and outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The estimates included in the presentation are for general information only and are not intended to provide specific advice or recommendations for any individual.
There are several other factors that should be considered before applying for Social Security. If you are married, deciding when to take Social Security should be a joint decision. This is because survivor Social Security benefits are dependent on when your spouse decides to file and receive benefits. As a widow or widower, you may be entitled to 100% of what your spouse was receiving when they filed for benefits. If your spouse decides to wait until age 70 to get their maximum benefit, you may be entitled to that same higher amount as a surviving spouse. Conversely, if your spouse files early at age 62 and receives a reduced benefit, your survivor benefit may also be reduced. In addition to survivor benefits, there are several other factors, such as remarriage, divorce, disability, or health concerns that can affect when you should consider taking Social Security benefits. For example, if you were married for at least 10 years, you may be eligible for benefits based on a former spouse’s work record, even if you are divorced.
As you can see, there are many factors to consider before applying for Social Security. Before deciding to delay benefits for a higher payment, it’s important to ensure that choice aligns with your overall financial situation and your family’s needs. Rather than relying solely on Social Security calculators that generally do not consider your specific financial situation, assets, and needs, working with a financial advisor can provide a more comprehensive view. Your Social Security decision doesn’t just affect you – it can impact your spouse or survivor benefits too. A thoughtful financial plan can help determine whether retiring now is realistic and allow you to evaluate different scenarios to identify the best Social Security strategy for you and your family.
Ready to make the right Social Security decision for your retirement?
Talk to a Cary Street Partners financial advisor today to see how your Social Security strategy fits into your overall retirement plan.
1 Limra
2 Pew Research
3 Smart Asset
4 Social Security Administration
Jeb H. Cogger, CFP®, ChFC®
Chief Marketing & Transitions Officer, Managing Director
With more than 30 years of experience in the financial services industry, Jeb leads Cary Street Partners’ Financial Planning Steering Committee, providing advisors with timely planning resources and valuable client-focused content.
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