Not sure when to take Social Security? Here are some factors to consider.

Since its inception in 1935, Social Security has provided the largest stream of income to America’s retirees. Almost everyone knows of a friend or relative who would not be able to maintain their standard of living without this vital benefit, which for high earners can exceed $1 million in value during retirement. The monthly benefit you will receive upon claiming varies substantially based on the age at which you claim. For these reasons, deciding the age at which you claim benefits is one of the most important financial planning decisions you will make in retirement.

The basics:

Although you can claim Social Security at any age starting at 62, once you reach 70, there is no benefit in waiting. Social Security has defined a Full Retirement Age (FRA) for the American worker. The significance of this is that this is the age at which you will receive 100% of the benefit that is calculated based on your earnings history. If you claim later, you will receive a bonus for each month you delay. Conversely, a penalty is applied for every month you claim prior to your FRA. For most of the program’s history, the FRA was 65. It has since been raised to the current age of 67 for workers born in 1960 or later. Those born between 1938 and 1959 have an FRA somewhere between 65 and 67.

When should you claim?

As a disclaimer, a multitude of factors should go into your decision of when to claim Social Security. This column will only scratch the surface of the possible considerations, and the best decision for you should be personalized based on your own individual and financial circumstances. As fee-only fiduciary advisors, counseling on this subject is one of the highest value services we provide to our clients nearing retirement age. However, the following list is intended to provide you with an introduction, which helps you formulate the right questions to research or discuss with your advisor.

Longevity:

This factor is the toughest to evaluate. Mathematically, the longer you live, the more you will receive if you delay claiming. However, no one knows their true odds, other than evaluating your overall health as you approach your earliest likely eligibility. On the other hand, if you are clearly in poor health or most of your close relatives have died prior to 75, it may make sense to claim early, or no later than your FRA. Most Social Security breakeven calculators will determine that to receive a higher lifetime benefit by claiming at 70, you must live into at least your early 80s.

How much do you need the income?

While we all want to get the most out of Social Security that we can, for some retirees, optimizing for the highest lifetime benefit is not the most important issue. Taking a higher benefit at 70 is not very appealing if you are struggling to pay your necessary expenses at age 62. If this describes you, you may have to consider the trade-off between having a stable income source earlier in retirement or receiving a higher lifetime income.

Your spouse’s Social Security:

For married couples, each spouse’s decision regarding when to claim is generally more complicated than the decision is for an unmarried person. The main reason for this is that in addition to your retirement benefit, your spouse is eligible for a spousal benefit while you are alive, and for a widow(er) benefit after you die, both of which are based on your income. The rules for eligibility are also different than those for the individual Social Security benefit. Getting into the details of these provisions is beyond the scope of this article, but the take-home message is that if you are married, you will benefit from researching this and hopefully consulting an expert.

Taxes:

Since 1984, Social Security retirement benefits have been subject to federal taxation. Most states, including Arkansas, do not tax Social Security. The amount of Social Security income that is included in your tax return depends on your overall income. In addition, the income threshold at which half of your Social Security benefit becomes taxable is low, and unfortunately, it has not risen over time with inflation. For these reasons, if you expect your other sources of income to decrease during your 60s (or you move to a more tax-friendly state), you may decide to delay claiming in order to reduce the amount of taxes you pay over time.

Are you still working?

Social Security imposes a retirement earnings test on individuals who claim retirement benefits prior to their FRA. Upon reaching your FRA, the earnings test is no longer applied. Practically speaking, this means that if your earnings exceed a certain threshold (which changes annually), a portion of the benefits to which you are entitled will be withheld and excluded from your monthly payout. However, if you claim early, the amounts that have been withheld will be calculated and added to your monthly income once you reach FRA.

As always, our tagline is helping busy people make smart financial decisions. If there is any way we can help you, please reach out to us.

Further Reading: Piper, Mike (2022). Social Security Made Simple. Simple Subjects, LLC.

© 2023 The Arkansas Financial Group, Inc., All rights reserved.

The Arkansas Financial Group, Inc. is a Fee-Only Financial Planning Firm located in Little Rock, AR serving clients in Arkansas and throughout the country.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Arkansas Financial Group, Inc. [“AFG]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from AFG. AFG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the AFG’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.arfinancial.com.

Please Remember: If you are a AFG client, please contact AFG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.