Director of Financial Planning at Blue Rock Dravo Bay. I’m strongly committed to the financial planning industry. I take great pride in empowering clients and becoming their financial confidant.
Social Security plays a pivotal role in your retirement plan—set to replace roughly 40% of your income in your retirement years. Maximizing your benefits means making the most of several factors:
- Your highest income-earning years
- Tax bracket management
- Marital status (spousal and survivor strategies)
- When you enroll in benefits
Your enrollment age is directly tied to your monthly check. Enroll too early and you could miss out on higher monthly payments but enroll too late and you might not be able to take advantage of that inflated monthly influx.
When’s the right time for you to start collecting benefits? Let’s dive in.
The Top Three Times You Can Collect Benefits
In general, there are three moments when you can enroll in benefits. Let’s take a look at the pros and cons of each.
Enroll Early at 62
In this case, the early bird doesn’t get the worm. Collecting at 62 permanently reduces your monthly benefit by about 30% (as compared to your full retirement age benefit). For those curious, yes, there is the ability to collect before age 62 but that right is reserved for the following conditions: your spouse or ex-spouse has died, you’re a qualifying dependent, or you’re disabled.
This means you can’t course-correct and receive higher monthly payments when you reach full retirement age. While you can withdraw your application within the first 12 months, you are responsible for repaying any received benefit.
Collect at Your Full Retirement Age
You can also enroll in benefits once you reach your full retirement age (FRA). Take a look at the SSA chart below to find yours.
Waiting until FRA means you’re eligible for your entire primary insurance amount, or 100% of your eligible benefit. Your primary insurance amount is the figure the SSA calculates when determining benefits off of your work record.
Delay Benefits Until 70
Every month you delay benefits after your FRA, you receive delayed retirement credits, which ultimately boost your monthly check. Those credits stop accumulating once you turn 70. If you’re in good health and have other sources of income to supplement expenses, waiting until 70 can be a great idea as it can increase your checks by about 25% (about 8% more per year after FRA).
What About Early Retirement?
Your Social Security benefits will be impacted should you choose to retire early. Think through the following.
- Your benefits are based on your 35 highest-earning years (indexed for average wages and applied to the SSA formula). Didn’t work that long? The SSA inputs a “0” for those years in the formula, which will reduce your overall retirement benefit.
- Know your income channels and needs. Some people might be able to draw from other sources and delay Social Security, whereas others may need to take it earlier to supplement living costs.
- Use your full retirement age as a guidepost. Your FRA will be really helpful when projecting your benefit—whether you take it early or wait.
- Let’s break this down even further. Benefits are reduced 5/9 of 1% for each month (up to 36 months) that you receive social security early. After the initial 36 months, benefits are then reduced 5/12 of 1% for those with an FRA later than 65.
Key Considerations Before Enrolling
Now that you know your options, which is right for you? Several factors come into play:
- Income need (current and future)
- Inflation (in general, the higher the inflation means the better it is to delay benefits)
- Growth rate (in general, lower growth means it’s better to delay benefits)
- Your health (existing conditions, family health history)
- Longevity projections (both yourself and your spouse)
- Spouse and other dependents
At Blue Rock, we work with you to perform a breakeven analysis, which determines the best benefit amount for you. Let’s take a look at an example.
Blue Rock Social Security Breakeven Analysis: A Case Study
In this example, we’ll use a made-up retiree, Rodger Rula. We’re working with Rodger to help him determine when to take his benefits.
If Rodger enrolled today, he’d receive $1,000 per month. In a year, he could get $1,080 per month. Which is better?
Delaying benefits, even by just one year, increases his monthly checks by 8%. But is the cost of waiting worth the money he’d miss out on now?
The breakeven analysis looks at how long it would take to make up the $12,000 deficit (taking $1,000 now) for an extra $80 per month in a year.
Remember, Social Security is inflation-adjusted, so Rodger could make up that $12,000 faster since he’ll earn more per year. The time value of money, a.k.a the growth rate, is also a critical factor.
All in all, it will take Rodger 17 years to make up the deficit (factoring in inflation and growth). Once he passes that break-even point, compounding effects skyrocket, and he will end up making significantly more in the long run. The longer you live, the more you’ll benefit from the compounding effect.
Is it Always Better to Delay Benefits?
All this talk about compounding benefits could make you think that delaying is always best, but that’s just not the case. Everyone’s financial and personal situation is different. Say, mathematically, it made sense for Rodger to delay benefits, but he passed away much earlier than expected.
Social Security can be a mathematical equation, but it (as with every other financial element) is also inherently subject to non-mathematical factors—health, preferences, goals, etc. It’s critical to review your plan each year and update it based on where you’re at.
Our goal is to make mathematically sound decisions when it comes to your benefit’s strategy but also remain flexible enough to make changes should they be required.
Our advice? Stay nimble.
How Are Social Security Benefits Taxed?
Most people will need to pay taxes on their Social Security benefits. Social Security taxes can get a bit complicated, as only half of your benefit is counted toward the tax threshold, but let’s look in more general terms.
- If you’re filing single and your provisional income (Adjusted Gross Income + half of your benefits + nontaxable income) exceeds $25,000, part of your benefits are likely taxable.
- If you’re married filing jointly and your provisional income (Adjusted Gross Income + half of your benefits + nontaxable income) exceeds $32,000, part of your benefits are likely taxable.
What percentage of your benefits will be taxed?
Up to 50% under the following conditions:
- Filing single, single, head of household or qualifying widow or widower with $25,000 to $34,000 income.
- Married filing separately and lived apart from their spouse for all of 2019 with $25,000 to $34,000 income.
- Married filing jointly with $32,000 to $44,000 income.
Up to 85% under the following conditions:
- Filing single, head of household, or qualifying widow or widower with more than $34,000 income.
- More than $44,000 in income if married filing jointly.
- Married filing separately and lived apart from their spouse for all of 2019 with more than $34,000 income.
- Married filing separately and lived with their spouse at any time during 2019.
Proactive tax planning is an integral part of our planning strategy. We’ll help you build a financial plan that takes your tax liabilities into account and work to manage your tax bracket to and through retirement.
Create Your Social Security Strategy with Blue Rock
Social Security is a critical component of your retirement plan. Selecting the right time to enroll for you depends on so many interconnected factors like your income needs, inflation, health, and retirement goals.
Our break-even analysis helps provide numerical evidence for collecting. Then, we bake in your health, inflation, and growth rates to present an answer completely tailored to your needs.
When should you take your benefits? We’d love to analyze your unique situation to help you maximize social security. Give us a call today.