I Want Mine, but When? Social Security Claiming

Just when should you start claiming Social Security?   The easy answer is to postpone claiming as long as possible.  If you delay until after your full retirement age (FRA), your benefit will grow 8% for every year you wait.  So why would you want to claim earlier?  The recipe can be complicated.  Let’s see if I can simplify.

If your FRA is 67, collecting at 62 will reduce your benefit by 30%.  Each $1,000 of benefit now becomes $700.  If you’re still working, it’s not advisable to collect before full retirement age.  Your benefit can be reduced one dollar for every two dollars you earn over the earnings threshold.  In addition, you could be taxed on up to 85% of the benefit you collect.  

Once you reach FRA, there are no earnings limits, but taxation remains.  Your benefit will not increase past age 70, so if you’re still working at that age, start claiming.

If you’re retired or working part time between age 62 and 70, Social Security can help with cash flow.  Consider this:  What assets do you have to live on while you’re waiting to take Social Security?  Do you have a pension or other deferred income?  Will you be withdrawing cash, invested assets or retirement plan assets?  If you must withdraw, you need to consider the consequences.  

At age 62, those assets may need to last 25-40 years.  Your withdrawal plan needs to be tax efficient and mitigate market risk. You don’t want to be forced to sell assets for living expenses if the stock market declines, nor do you want to spend down all of your investment assets, leaving only deferred retirement assets to fund your later years.  You may end up with a large, unwelcome tax bill in your old age.  Keep a year’s worth of cash available.  Perhaps begin small withdrawals from your retirement assets to create a tax glide path.  Or start collecting Social Security. 

Since Social Security growth of 8% is attractive, if you have the resources to delay, do so.  Although it is hard to contemplate spending money you’ve saved throughout your working years. Decumlation studies have found retirees tend to avoid dipping into assets. For many, early claiming may be attractive, but it’s not sufficient justification to take a permanent reduction in benefits.

I’ve talked to several people who decided to claim early. In each case, they were considering other risks.  One was concerned about the ambiguity surrounding future funding of Social Security; she wanted to collect now so she would be grandfathered into any changes.  Another had health concerns and felt it was to his benefit to start collecting sooner.  Still a third saw no reason to deprive himself, as he was ready to retire with a little extra cash flow while he was young enough to enjoy it.  

Like a soufflé, the ingredients are simple, but the execution can be challenging.  Review the ingredients (income and assets), but study the execution.  Keep in mind your risks: market, taxation, legislative, health and mortality.   A careful technique will provide the best results.   

Next up, claiming strategies.