Seniors have a number of important decisions to make, but few have the long-term impact of deciding when to begin taking their retiree benefit from Social Security.
As you may already know, there are four primary factors that go into determining what your monthly payout will be at full retirement age — i.e., the age at which the Social Security Administration (SSA) deems you eligible to receive 100% of your monthly payout, as determined by your birth year. These four factors include your work history, earnings history, birth year (which determines your full retirement age), and the age at which you begin taking benefits.
Here’s how your Social Security benefit is determined
Generally speaking, the more you make each year, up to a certain point, the higher your monthly Social Security benefit will be. The SSA takes into account your 35 highest-earning, inflation-adjusted years when arriving at your annual average, which it then divides by 12 to determine your average indexed monthly earnings.
Your full retirement age acts as the pivot point that’ll help determine whether you can expect a permanent reduction or increase in your monthly payout. Most folks have a full retirement age of 66, 67, or somewhere in between. Claiming benefits at any point before your full retirement age means accepting a permanent reduction of as much as 30% to your monthly payout, depending on your birth year. Meanwhile, claiming later than your full retirement age could boost your monthly benefit by up to 32% (again, depending on your birth year). In general, your monthly payout grows by approximately 8% for each year you hold off on taking it, beginning at age 62 and up until age 70.
Finally, there’s your claiming age. As alluded to, taking benefits as early as possible (62) can mean a significant reduction in monthly payouts, whereas waiting as long as possible (70) can result in a much larger monthly stipend. All things being equal (work and earnings history, along with birth year), a worker claiming benefits at 70 could receive a 76% larger monthly benefit check than an individual claiming at 62.
Claiming at your full retirement age has unique benefits
There is no perfect claiming strategy for everyone, which is why it’s such a big decision for seniors. While keeping in mind that there is no one-size-fits-all strategy, here are three under-the-radar reasons you should consider waiting until at least your full retirement age before taking benefits.
1. You’ll avoid the retirement earnings test
Arguably the best reason to hold off on taking your Social Security retired-worker benefit until your full retirement age is that it’ll mean completely avoiding the retirement earnings test.
The retirement earnings test allows the SSA to withhold some, or all, of your benefits if you exceed a certain income level and have not yet reached your full retirement age (which the SSA often calls a “normal retirement age”). People who have begun taking their payout before their full retirement age, and who won’t reach their full retirement age this year, are only allowed to earn up to $17,640 ($1,470 per month) in 2019 before withholding kicks in. For each $2 in earnings above this level, $1 in benefits can be withheld.
If you’ll reach your full retirement age in 2019, but have yet to do so, you’re allowed to earn up to $46,920 ($3,910 per month) before withholding begins. In this instance, $1 in benefits is withheld for every $3 in earnings above this threshold.
The good news is you don’t lose these benefits for good. Rather, you’ll receive these withheld benefits back in the form of a higher monthly payout after you reach your full retirement age. But the point is that the retirement earnings test doesn’t apply to any beneficiary who has hit full retirement age. Simply waiting until then to claim benefits means never having to worry about the SSA withholding a dime of your benefit (unless you want them to for tax purposes).
2. Your spouse will have the opportunity to max out the survivor benefit
Another under-the-radar reason to consider waiting until at least your full retirement age is that it’ll potentially put your significant other on better financial footing if you pass away first.
We often think of Social Security as a wholly personal decision — and to some extent it is. Our work history, earnings history, birth year, and claiming age are what’ll determine what we bring home each month in benefits. But if you’re married, or happen to have young children, then your claiming decision is actually more of a family affair. Your claiming decision can be especially important if you’re the household breadwinner.
For example, if you wind up taking your retired-worker benefit as early as possible (at 62), your monthly benefit is permanently reduced. The concern is that, should you pass away before your significant other, your spouse’s survivor benefit would be based on your reduced monthly payout. By waiting until your full retirement age and netting 100% of your due monthly payout, you’ll be ensuring that your spouse has the opportunity to maximize the survivor benefit.
Just keep in mind that survivor benefits only come into play when the monthly payout of the survivor benefit is higher than surviving spouses would receive from their own work and earnings history.
3. You may owe less in taxes
A third under-the-radar reason to consider your full retirement age as the green flag to take benefits is that waiting a few extra years could actually reduce your tax liability.
According to The Senior Citizens League, roughly half of all senior households owe some level of federal tax on their Social Security benefits today. Not to mention, 13 states also tax Social Security benefits to some varied degree. Since the income thresholds associated with both tiers of the taxation of benefits haven’t been adjusted for inflation in decades, the number of retired workers affected by this tax is only expected to increase over time.
By holding off on taking benefits for a few years, you’re reducing the aggregate amount of tax you may owe while in your early to mid-60s. Arguably, in terms of importance, a lower tax bill pales in comparison to securing the financing footing of your spouse. But it’s nevertheless a valid reason to consider waiting.
The only question left to ask yourself is whether waiting until your full retirement age makes sense.