There are several individual factors that go into the determination of when the best time is to begin collecting Social Security benefits. Among those factors are the size of your estate, the amount of money you and your spouse may need to continue your desired lifestyle in retirement, and last, but not least, your estate planning goals.
The Social Security Administration (SSA) says you’re entitled to receive 100% of the benefits based on your earnings history at full retirement age (FRA). The FRA, which is based on the year of your birth, ranges from age 65 for those born in 1937 or earlier to age 67 for individuals born in 1960 or later. For Baby Boomers born between 1943 and 1954, the FRA is age 66.
But you don’t have to wait until your FRA to receive benefits. In fact, you can elect to begin taking benefits as early as age 62, although monthly benefits will be reduced. The monthly reduction can be as much as 25% of the FRA amount, and even higher for those born after 1954.
The closer you are to your FRA when you apply for benefits, the smaller the reduction. Conversely, if you choose to delay benefits, you’ll receive a higher monthly amount than the FRA amount. Essentially, your benefits are increased by 8% for each year you delay taking benefits until age 70. Thus, the maximum increase for Baby Boomers with an FRA of 66 is 32%, and for those born after 1954 the maximum increase is less. Once you reach age 70, the benefits are maxed out.
Should you opt to begin receiving benefits before your FRA or hold off? One thing to consider is the fact that you may live longer than you initially thought because of medical advances. If this occurs, it’ll further stretch the resources needed to sustain a comfortable retirement. On the other hand, you might decide to retire early and rely on benefits while you’re still enjoying good health. Applying for benefits at your FRA may be a reasonable compromise.
Let’s take a look at key factors that may affect your decision:
Accumulated assets. Do you have enough funds to live on if you choose to apply for benefits early? You may have heard horror stories about people outliving their savings late in life.
However, if you’ll be spending less in retirement, it’s possible that your needs won’t be as great. Breakeven point. At some point, you’ll come out ahead dollar-wise if you delay benefits (and you live long enough). This “breakeven point” depends on the amount of your benefits and the assumptions used to account for taxes and investment opportunities.
Earnings test. If you receive Social Security benefits before your FRA, and you continue to work, they’ll be reduced. Under this “earnings test,” you must forfeit $1 in benefits for every $2 earned above an annual limit ($17,640 for 2019) divided by 12. Thus, if you earn more than $1,470 per month your benefits will be phased out. In the year in which you reach your FRA, the reduction is $1 in benefits for every $3 over another limit ($46,920 for 2019), although it applies only for earnings prior to reaching your FRA. After you reach your FRA, there’s no reduction in benefits. Thus, in that year, if you earn $46,920 prior to your FRA and another $46,920 after your FRA, there’s no reduction.
Don’t discount the impact that Social Security choices can have on your estate plan. Notably, a surviving spouse may be entitled to benefits based on his or her deceased spouse’s history. And in limited cases, adult children may claim benefits based on a deceased parent’s Social Security choices.
Talk to us about how best to coordinate your decisions regarding Social Security with other aspects of your estate plan.