3 Questions to Ask Yourself Before Claiming Social Security

Millions of Americans count on Social Security as a steady source of income in retirement. These days, the most popular age to start taking benefits is 62 -- the earliest age at which you can collect. And while many Americans do wait until their full retirement age to claim benefits, only a small percentage of Americans wait longer. The age at which you first collect benefits can have a major long-term impact on you financially, so it's important to consider the consequences of when you claim. If you're thinking of claiming Social Security this year, here are three key questions to ponder before making a move.


1. Am I really ready to stop working?

You can collect Social Security benefits and work at the same time. However, your benefits may be reduced depending on your age and earnings level. Once you've reached your full retirement age, you can work and collect your benefits without having to worry about a reduction. But if you're younger than your full retirement age for all of 2016, your benefits will be reduced by $1 for every $2 you earn above $15,720.

Now if you're closer to full retirement age, you get a little more leeway. If you're collecting Social Security and working in 2016 but won't reach your full retirement age till later in the year, your first $41,880 in earnings are exempt from benefit reductions. However, you'll lose $1 for every $3 you earn above that threshold until the month in which you reach your full retirement age.

If you're still in a position to keep working, you may want to consider holding off on Social Security, particularly if you're several years away from your full retirement age. Not only will you potentially lose a portion of your benefits because of your earnings, but you'll also subject yourself to a benefits reduction for claiming early that will last for the rest of your life.

2. Do I need my benefits right away?

If you have savings or another source of income, you may be able to hold off on claiming Social Security even if you've reached your full retirement age. And that's a good thing, because for every year you delay taking Social Security past your full retirement age, you get an 8% bump in benefits. While this incentive runs out at age 70, what it means is that if your full retirement age is 66 and you hold off the full four years, you'll be eligible for 132% of your original benefit amount by the time you start collecting those payments. Best of all, this boost in benefits will carry for as long as you collect Social Security. So if your original full benefit amount is $1,500 a month and you hold off on collecting for four years, you'll increase your payments to $1,980 for the rest of retirement.

3. Will my benefit amount be enough to sustain me in retirement?

Though Social Security is only designed to replace about 40% of your pre-retirement income, according to the National Academy of Social Insurance, as many as 65% of beneficiaries rely on Social Security to provide the majority of their income once they're no longer working. Furthermore, Social Security serves as the sole source of income for almost 25% of retirees 65 and older. If you're counting on Social Security to stay afloat financially in retirement, you'll need to consider whether your full benefit amount will provide enough money for you to get by, and whether it pays to work an extra year or two to increase it.

Your Social Security benefits are calculated based on your highest 35 years of earnings. So let's say you only earned money for 33 years over the course of your career. What this means is that your personal benefits formula will contain two $0 years out of those 35. But if you replace those two $0 years with two additional years of earnings, you'll see your benefits go up. Even if you did put in 35 years in the workforce, there's a good chance you're making more money now than you were in the past. If you're able to work an extra two years at a much higher salary than what you made when you first started out, you'll not only generate extra income to use up front, but you'll also replace a couple of years of lower earnings with higher earnings.

Deciding when to collect Social Security is a major decision, and not one to be taken lightly. You might be tempted to claim Social Security as soon as you're eligible, and for some people, that is the right move. On the other hand, there are certain benefits to waiting, so before you pull the trigger, take the time to consider which strategy is right for you.

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