When should you claim Social Security?

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One of the biggest decisions for most retirees is when to claim Social Security retirement benefits. A majority of retirees depend on Social Security for the bulk of their income, according to the Social Security Administration. The decision of when to take benefits has repercussions not only for your retirement, but also for your spouse and family.

Many financial advisors suggest waiting to claim Social Security until full retirement age or even until age 70, because your benefits are permanently reduced by claiming early. Your benefits are 76% higher if you claim at age 70 compared to claiming at age 62. What’s more, if your spouse or relatives claim Social Security benefits based on your earnings, those benefits are reduced as well.

Nevertheless, the vast majority of people start taking benefits at age 62, the earliest age at which you’re eligible. Only 1% of people wait until age 70.

When you claim Social Security before full retirement age (FRA), you receive payments immediately, but your check amounts are lower than they would be if you waited. Each payment is reduced by about 8% for each year that you claim benefits earlier than FRA. But there are a few other things to consider when deciding when to claim.

1. Your life expectancy. The breakeven occurs at around age 77, which is close to the U.S. average life expectancy of 78.8 years. Before that age, a person who claimed benefits at age 62 receives more cumulative benefits. After that age, a person who waited until FRA starts coming out ahead. After age 82, a person who waited till age 70 starts coming out ahead of someone who claimed at 62.

You can estimate your life expectancy using one of the calculators linked on the Links page.

What if your life expectancy is much lower than this breakeven age, based on your personal and family health history? Then it may be to your advantage to claim benefits early. Keep in mind, though, that your decision will also affect any of your dependents who claim benefits based on your earnings.

2. Your investments and inflation. The breakeven ages depend greatly on future inflation and investment returns. If you start taking benefits early and invest the payments with a return greater than the 8% per year that you get from Social Security, then clearly it would be advantageous to take benefits early. Just keep in mind that higher-return investments come with greater risk, and once you’re in retirement you have less time to make up for any losses.

Additionally, if you expect inflation to be significantly higher in the future, it may be advantageous to start taking benefits early, because payments now are worth more than they will be later. Social Security recipients haven’t received a cost of living increase for the last few years. Considering Social Security’s financial state, that trend will likely not change much.

3. Your lifestyle. Another situation is if your lifestyle needs support taking Social Security early. Maybe you need or want the money earlier in order to help your children, begin renovations on your home, meet a medical expense, or so you can leave your job and begin your retirement earlier. In that case, you may want to claim benefits when you first become eligible.

If you choose to take Social Security later, for example because you’re in good health and have a family history of longevity, then of course you’ll have to do without those payments for up to 8 years. Here are some ways you can bridge the gap.

1. Your savings and investments. If you have savings in retirement accounts like IRAs and 401(k)s you can take distributions starting at age 59 ½, or earlier for qualified expenses. You can use the proceeds from these and other accounts to meet expenses.

2. You can make investments that pay a regular return. Some possible options are dividend-paying stocks, and mutual funds that invest in such stocks, conservative stock options like covered calls, and rental properties, real estate investment trusts, or master limited partnerships.

Bonds and certificates of deposit are another choice, but with current interest rates so low, these “safe” investments likely don’t pay enough interest unless you have a large sum to invest in them.

3. Annuities. If you have a cash nest egg, annuities are a way to generate guaranteed income. Just be careful of fees and review the terms and the solvency of the company underwriting the annuity, because annuities aren’t all created equal.

4. Borrowing against insurance policies and retirement accounts. If you have a life insurance policy with a substantial cash balance, depending on the type of policy you may be able to withdraw some cash from the balance.

5. Reverse mortgage. If you own your home, a reverse mortgage may be a way to tap into the equity to generate income.

6. Working. If you are staying at your job, then you might want to delay claiming Social Security anyway, because your wages may push your income into a range where Social Security becomes taxable.

However, not everyone has the option to just keep working. A substantial proportion of retirees leave the workforce earlier than planned each year. And older workers often have a hard time getting new jobs, because many employers prefer younger workers who are less expensive and seen as more tech-savvy.

Fortunately, the digital economy presents numerous income opportunities. Such opportunities are flexible and customizable, ideal for retirees who need income but not the restrictions of a regular job. For example, Uber recently announced a partnership with AARP to increase recruiting of senior drivers.

Websites like Etsy, Airbnb, and Upwork enable people to connect with customers globally to sell arts and crafts, make rooms available for short-term rentals, and perform fee-based digital services.

Many retirees have specialized knowledge and skills they can use to help or teach others. Online collaboration, video, and courseware tools make it easier than ever to create graphics, produce software, or provide instruction and tutoring for customers located anywhere in the world.

Taking advantage of the new “gig economy” can help bring in some income, make it easier to postpone reliance on Social Security, and even provide the all-important mental stimulation and prevent boredom in retirement.

This video explains the two major changes to Social Security rules in 2016.

 

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