Claiming Social Security

Written By: A. Suzanne Robertson, CFP®

Over the past two weeks in this space, Matt Jaskolka talked about withdrawal strategies to help you maximize the tax benefits and longevity of your retirement savings.  If you haven’t read his posts, I strongly encourage you to do so.  His and the rest of the Carlson team’s previous posts can be found on the Carlson Financial website in Carl’s Corner here.  This week, we are discussing when to claim your Social Security to help ensure you start your benefits when it’s right for you and your family.  This is a decision that will affect you and the people that depend on you for the rest of your life and potentially theirs.  It certainly shouldn’t be taken lightly, and the factors to consider can be very complex.  This post will introduce some of the questions you should be able to answer before making your decision.

Workers and their spouses can start collecting Social Security as early as age 62.  The monthly benefit, however, is discounted for each month they claim prior to Full Retirement Age (FRA) and will stay discounted for life.  On the other hand, Social Security benefits are increased 2/3 of 1% for each month a worker waits to claim after their FRA.  The calculation can become complicated,  so when talking to clients, I like to start conversations about Social Security by asking if they have established a log-in at, and acquired a copy of their Social Security benefits statement. 

Full Retirement Age (FRA)
Year of BirthFull Retirement Age
1937 and Earlier65
193865 and 2 months
193965 and 4 months
194065 and 6 months
194165 and 8 months
194265 and 10 months
1943 – 195466
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 and later67

Among other things, current Social Security benefits statements reflect your FRA, total credits earned toward Social Security, and a graph showing what your benefit will be based on when you start claiming from age 62 through age 70.  There is no advantage to waiting past age 70, as this is when your benefit will have reached its maximum. 

Once you look at your statement, and can clearly see how much higher your benefit will be by waiting to age 70, it’s easy to think waiting is the way to go.   And, in fact, I’ve seen a lot of advisors automatically default to that.  After all, for every year you wait to claim past your FRA, you will receive an additional 8% in benefits.  Presuming your FRA is age 67, and your monthly benefit is estimated at $2,000 per month, waiting to age 70 will get you an extra 24% or $480 per month for the rest of your life.  If you claim at age 62 however, your benefit would only be $1,400 per month.   I don’t know about you, but I’m thinking it would be much nicer to live off $30,000 per year than it would be to live off $17,000.   To do this, however, means 8 years of collecting nothing.  Using our illustration of $1,400 per month, multiplied by 96 months, that’s $134,400.  At $1,080 additional per month, it would take nearly 125 months, or over 10 years before I collect that amount.  By that point, I’m 80 years old and I haven’t factored in interest or potential investment returns for the $134,400 in assets I had to liquidate to generate the $1,400 per month I would have received from Social Security.  The higher the returns I’m able to generate by keeping it invested, the longer it would take for me to reach a break-even point.  More and more, we’re starting to see an advantage to claiming earlier.

Another factor that might make me consider claiming earlier, is if I have a spouse and/or any dependent children.  As a general rule, your spouse who has reached their full retirement age is entitled to 50% of your monthly benefit.  Did you know your children could be too?  Unmarried children who are under age 18 (19 if still in high school) are entitled to ½ of your FRA benefit from the time you start claiming, even if you take the smaller benefit at age 62.  So now, using our previous example, I’m receiving my $1,400 per month reduced benefit, and my children can each receive an additional $1,000 per month, up to my family benefit limits until they turn 18.  There are limitations and complicated formulas.  Additionally, those benefits will be cut off when they turn 18 (19 if attending high school) so we would need to take that into consideration as well.  Clearly though, dependent children are an important factor in timing your Social Security benefit, and could potentially extend your break-even point.  If my spouse was a higher earner or had income similar to mine, in many cases their benefit would exceed what they would receive from mine so, in that situation, there is little to no value in waiting to claim and I would likely want to start my benefits earlier rather than later.

So, knowing the above, and knowing my spouse can’t claim against my earnings until I do, why would I ever want to wait until age 70 to start collecting my benefits?  The consideration here will again be my spouse.  It all depends on their lifetime earnings as to which strategy makes the most sense.  My health might be such that I don’t expect to live past 80 but presuming my spouse did not have an income of their own and is able to wait until age 67 to collect, they will receive 50% of whatever benefit I am collecting until I pass away, at which time, assuming they are at least 62 years old, their survivor benefit is 100% of mine.  In that situation, I would want my benefit to be as high as possible for them. 

Another factor that might make me choose to delay claiming my benefits at least until my FRA, is the earnings test.  From age 62 until FRA, Social Security will reduce my benefit by $1.00 for every $2.00 I earn over a certain threshold.  We discussed how my ability to earn money off of an early benefit could extend my break-even period but what if my earnings are such at age 62 that half or possibly even 85% of my Social Security benefit becomes taxable and on top of that it is reduced due to the earnings test?  If we are looking at net numbers, my break-even period just got much shorter.  Waiting would potentially make even more sense if we are incorporating some of Matt’s Roth Conversion strategies because we want to keep our income in those years as low as possible to enable us to convert utilizing lower tax brackets.

Clearly, the decision of when to claim your Social Security benefits is one requiring thought and complex analyzation.  The options can be overwhelming.  The good news is…

This week in history

1921 – 101 years ago on Nov. 9, Albert Einstein received the Nobel Prize in Physics.

1926 – The historic US Route 66 was established.

1989 – The Berlin Wall came down on Nov. 9, 1989. In 1987, President Ronald Reagan called for the Wall to be torn down. (But Reagan was no longer in office when it finally came down; George H.W. Bush was President when the Wall fell.)

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