Understanding your Social Security benefits is an important part of retirement planning for many Americans. Eligibility for Social Security benefits based on your earnings record begins at age 62, so take the time to understand the rules to help you make the most of your benefits from the system. This article focuses on several important factors to consider before claiming Social Security retirement benefits.
Claiming Benefits Early
One of the most important factors to consider is the impact of claiming benefits before your full retirement age (FRA), which is the age at which you are entitled to full benefits. If you decide to collect benefits as early as age 62, your monthly retirement benefit will be permanently reduced. The reduction is typically 25% to 30% less than it would be by claiming at full retirement age (FRA). FRA is the age at which you can claim your standard Social Security benefit. By waiting until FRA, you can receive a higher monthly benefit.
Waiting Longer to Claim Benefits
Delaying benefits past FRA can have an even greater impact on lifetime benefits. Your monthly benefit increases every month you delay past FRA, up to age 70. This can have a significant impact on lifetime benefits, as any future cost of living adjustments will be applied to this higher base.
Consider your Cash Requirements
Before filing for Social Security benefits, it is important to consider your cash needs. Understand all resources at your disposal to meet your near-term objectives and determine whether you need the extra income at this time. If you do not need the extra income, delaying benefits may be a better option.
Break-even age
Another factor to consider is the break-even age. This represents the age at which the cumulative benefits of a strategy surpass the strategy to claim as soon as possible. These are the ages after which delaying benefits would lead to an increase in total lifetime benefits over the span of your life and your spouse’s life. Calculating your break-even age can help you determine whether delaying benefits is the best option for you.
Life expectancy
Longevity is also a critical factor to consider. It can be worth delaying if you expect to live a relatively long life since your survivor retains the larger of the two benefits.
Marital status
Another critical factor to consider is your marital status. Think about how your decision will affect the lifetime benefits to both you and your spouse. The age at which you begin receiving benefits may significantly affect the amount of lifetime income you and your spouse receive, as well as the benefit the surviving spouse would be entitled to. Under current rules, the survivor of a couple retains the higher benefit and loses the smaller benefit.
Earning income during retirement
Finally, earned income can affect your decision to claim benefits. If you are still working, you may benefit from postponing benefits until you completely stop working to earn income. While you are employed, some of your benefits may be temporarily withheld based on your income. If you are currently in a relatively high federal income tax bracket, delaying can help reduce the amount of benefits subject to income taxes.
Consult with a financial planner
Taking the time to develop a strategy for claiming Social Security benefits is a crucial part of the retirement income planning process. By considering factors such as your cash needs, break-even age, longevity, marital status, and earned income, you can optimize your lifetime Social Security benefits. It may be a good idea to seek guidance from a financial planner to help you understand your options and develop a comprehensive retirement income plan.