Social Security benefits represent a significant portion of most retirees' incomes, so deciding when to begin collecting is extremely important. You can maximize these benefits when you make the right decisions. Coordinating benefits with other sources of retirement income you might have can potentially earn you thousands of extra dollars in after-tax income if you do it right.
More than 75 percent of individuals who stop working before age 62 apply for Social Security benefits within two months of reaching that age. In many cases, it would be far more advantageous for them to use other savings to support their lifestyles for a while, even including taking some IRA withdrawals to delay the start of their Social Security benefits.
Many of the Social Security decisions you make are irrevocable, but if you're single, the decision is less complex than if you're married.
Social Security at Age 62 vs. Age 70
Social Security benefits can be claimed at any time from age 62 until age 70. You'll receive a “full” retirement benefit called the primary insurance amount or PIA at your full retirement age. In 2020, that's age 66 and 2 months for individuals who were born between 1943 and 1954. Your benefits will be less if you begin collecting before age 66, and they'll increase if you begin after 66.
The maximum benefit is achieved if you wait until age 70. It's a significant 76 percent more than what it would be if you started benefits at age 62. Here's a table showing the monthly benefit amount received starting at ages 62 through 70 with a PIA of $1,000.
Claiming Age: Benefit Amount
- 62: $750
- 63: $800
- 64: $867
- 65: $933
- 66: $1000
- 67: $1,080
- 68: $1,160
- 69: $1,240
- 70: $1,320
The Impact of a Single Expected Lifetime
A single individual who expects to live longer than average can benefit from delaying the start of benefits while those who expect to live shorter than average can benefit from claiming early. In general, women benefit more from delaying benefits due to their longer life expectancies.
Studies show that cumulative lifetime benefits are approximately the same for an individual who lives to age 80 regardless of whether he begins benefits at any age from 62 through 70. Ages 80 through 82 are often called the "break-even age" because it's to your benefit to take Social Security later rather than earlier if you live longer than this.
The Flaws in the Break-Even Age Analysis
Although the break-even age might be an important part of a thorough analysis, using it as the only factor in determining when to begin Social Security is flawed for several reasons.
Social Security serves as a valuable hedge against outliving your assets. Research shows that delaying benefits until age 70 can extend your portfolio’s longevity by six to 10 years. You might think that you'll probably live until age 82, but what if you live to a healthy and productive 92? Delaying Social Security protects you against outliving your money.
Considering only the break-even age neglects the impact of taxes. If Social Security is your only source of income, you'll pay no taxes on your benefits, but you could end up paying tax on up to 85 percent of your benefits if you have other sources of income. But you can choose to withdraw savings instead and delay the start of your Social Security benefits. In many cases, this strategy can significantly increase your available monthly retirement income or extend the longevity of your portfolio when it's viewed on an after-tax basis. Run detailed tax projections to determine the type of withdrawal strategy that will deliver the most after-tax income for you.
The Social Security Earnings Test
One additional factor that's often overlooked is the earnings test. Individuals who are working for pay and who nonetheless claim benefits prior to full retirement age face a reduction in their monthly benefits if their earnings exceed the earning limit.
The reduction is temporary—after you reach your FRA, monthly benefits are adjusted upward to offset the earlier reduction. But because of the way the benefit recalculation works, it can take 13 to 14 years to recover the reduced benefit amounts. It's almost always to your advantage to wait to claim benefits until you reach your FRA if you plan to continue working.
A Previous Marriage of 10 Years or Longer
Here's one more factor for singles to consider: If you were ever married and that marriage lasted at least 10 years, you may be eligible to collect benefits on your ex-spouse's work record. In this case, think about your Social Security claiming decision more as a married individual would. You might be able to use a spousal benefit for a few years, then switch to your own benefits, or vice-versa. Such strategies will boost your lifetime income.