Social Security Retirement Planner: When to Start Your Benefits

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Social Security income plays a critical role in ensuring the financial stability of a majority of seniors during their golden years. According to the Social Security Administration, slightly more than 3 in 5 seniors rely on Social Security to provide at least half of their monthly income.

Because this income is so critical to the financial well-being of retirees, deciding when to start taking Social Security benefits could arguably be described as the most important financial decision a person makes during their lifetime. Enroll in Social Security too early and you could be stuck with a reduced payment for the remainder of your life. Wait too long and you may be forced to rely on your other channels of income, or simply be required to work longer, to make ends meet.

Understanding the importance of your full retirement age

There is no perfect roadmap that everyone follows when it comes to filing for benefits, but one commonality shared by all retirees is the need to understand how their full retirement age, or FRA, impacts their benefits.

An individual's FRA is the age at which the Social Security Administration (SSA) deems they're entitled to receive 100% of their retirement benefit. FRAs are somewhat fluid and dependent on a person's birth year. As you can see by this handy retirement planner from the SSA, the full retirement age for new retirees born in 1955 is going to begin rising in 2017, with the FRA topping out at 67 years for those born in 1960 and later.

Since your full retirement age is the point at which you become eligible for 100% of your benefits, it serves as the pendulum that determines whether you receive less than 100% of your primary insurance amount during retirement or more than 100%.

The Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.

Benefits can begin as soon as you turn 62, and for each year you decide not to enroll, your benefits grow by approximately 8%. Your payout even increases incrementally on a monthly basis, so waiting even a few extra months to enroll can help boost what you'll receive. Thus, depending on your FRA, starting benefits as soon as possible could lead to a 25% to 30% reduction from your benefit at full retirement age. Conversely, waiting until age 70, the age at which Social Security benefits stop accruing, could lead to between 24% and 32% in extra payouts on top of your benefit at full retirement age. The chart above for people born between 1943 and 1954 with an FRA of 66 years gives a pretty good idea of what percentage of your retirement benefit you'll be due based on when you sign up if you were born between 1943 and 1954.

When to start benefits

Now that you have a good understanding of the foundation behind your benefit payment, let's take a look at some of the underlying factors that could influence when it might be best for you to start benefits.

1. Are you healthy?

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Even though none of us has a crystal ball telling us our expiration date, we do generally have a good idea of how healthy we are. Our own health history and that of our immediately family generally serves as a good estimator of whether or not we'll live longer than the average American (which is nearly 79 years, according to the Centers for Disease Control and Prevention). If you have a chronic health condition that has a good chance of shortening your life expectancy, then filing for benefits before reaching your FRA is often a smart choice. If you're a healthy individual, on the other hand, then waiting to file for benefits is usually the best move.

The inflection point for your decision tends to be around age 78. At age 78, people who've taken a reduced lifetime payout and filed for benefits at age 62, and those who've waited until age 70 and maximized their benefits, will have received about the same in lifetime benefits from the SSA. If you believe you'll live longer than age 78, then waiting until after your FRA to sign up will net you a larger lifetime benefit.

2. Do you have other income channels?

Another factor to consider is whether you have other channels of income or not beyond Social Security.

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One of the biggest mistakes seniors make when signing up for Social Security is doing so when they have little or nothing saved. Starting benefits early does generate monthly income, but when you're likely to be reliant on Social Security due to a lack of savings for the remainder of your life, taking a large reduction in your primary insurance amount isn't a good idea. Instead, working for as long as possible (assuming you're healthy) and using your wages to pay for your monthly expenses while allowing your benefits to grow is the wiser decision.

By that same token, you should also take into consideration whether you plan to work beyond age 62 or not. While it might sound great to double-dip and collect both Social Security income and a working wage, the SSA sets a thresholds for how much a person can earn in a given year while collecting Social Security before reaching their full retirement age. In 2017, for every $2 in wages earned above $16,920 ($1,410 a month) the SSA can withhold $1 of your Social Security benefits if you haven't reached your FRA and won't hit your FRA in 2017. This means you might receive far less in extra income than you expected when you signed up, or you may not receive anything extra at all. The good news is these withheld benefits aren't lost -- you get them back after your hit your FRA in the form of a higher monthly payment. But the lesson is that it would have been better to have waited to enroll later if you planned to keep working.

3. Are you married?

The final piece of the puzzle is deciding if your claiming decision affects only you, or if you have a spouse and/or children who may be affected by your decision. If you're unmarried and have no children, then your health and access to other channels of income are really what matter. But if you are married, then you'll probably want to consult your spouse before making this important decision.

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To begin with, the age at which you file for benefits can impact your spouse if you pass away before him or her. A surviving spouse has the option of receiving a survivor's benefit based on the earnings history of their spouse, or their own benefit based on their earnings history, whichever is higher. If a spouse files for benefits before reaching their FRA, the survivor benefit for the remaining spouse will be reduced as well.

Likewise, married couples where one spouse earned significantly more in lifetime earnings than the other spouse could benefit from a little strategizing. In this instance, the spouse with the lower lifetime earnings can sign up early, thus providing at least some recurring income for the couple during retirement. Meanwhile, the higher-earning spouse waits until after their FRA to truly maximize their benefit, leading to a sizable improvement in the couple's total payout during retirement. Furthermore, having the higher-earning spouse wait to file could allow the lower-earning spouse the opportunity to switch to what could be a substantially larger survivor benefit should the higher-earning spouse precede him or her in death.

There is no concrete formula for when you should start taking Social Security benefits, but answering these questions should help you make an informed decision.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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