Retirees often agonize over determining the optimal time to claim Social Security. With the average retiree relying on Social Security to provide over 36% of their retirement income (Social Security Administration) – it is easy to see why. From early distributions at age 62 to waiting until normal retirement age (NRA) to maxing benefits at age 70, there are many factors to consider and making the right choice can have a significant impact on retirement success.
What is a “normal” retirement age?
The Social Security discussion really begins with a review of “normal retirement age”. NRA or Full Retirement Age is known as the age when you are eligible to receive full Social Security benefits and varies depending on your date of birth. While age 65 was the NRA for those born in 1937 or earlier, retirees born later will have to wait longer to claim full benefits. For example, retirees born between 1943 and 1954 have an NRA of age 66 while retirees born from 1955 to 1959 will have an NRA of 66 + 2 months for each year beyond 1954. Finally, retirees born after 1960 will have an NRA of age 67. It is important to be aware of your NRA, as claiming benefits early will result in a reduction in the amount you may receive.
Despite what your NRA may be, retirement benefits can be claimed as early as age 62 (age 60 for certain widow benefits). Keep in mind, claiming early comes at a cost — reduced payments. For example, if your normal retirement age is 66 and you begin Social Security at age 62, you can expect to receive 75 percent of the benefit you would have received if you waited until full retirement age. Also keep in mind, claiming Social Security before NRA while working and earning more than $17,040 in 2018 ($17,640 in 2019) can result in a reduction in benefits $1 for every $2 before NRA and $1 for every $3 in the year you reach NRA.
For each year that you postpone Social Security up to age 70, the benefit increases. For the above example, at age 65, you will get 93.3 percent of the monthly benefit. Each year that benefits are postponed after reaching your NRA will result in an 8 percent raise (until age 70). Visit www.ssa.gov/planners/retire/ageincrease.html to review a retirement age calculator.
Interestingly, the reasons why people choose to claim at different ages may actually surprise you. A recent study published in the Journal of Financial Planning titled “Understanding Social Security Claiming Decisions Using Survey Evidence” noted that there was little evidence that claiming decisions and rationales for claiming were correlated with financial literacy or knowledge of Social Security rules. In fact, 13 percent of respondents noted they were not aware of the rule increasing benefits for delayed claiming, and 54.6 percent said they were aware of it but it had no influence on their choice. Instead, decisions were based upon life-based factors related to work, health or financial needs.
For example, the largest percentage of respondents who claimed their Social Security benefits early did so based upon the following rationale:
38.4 percent - Had stopped working
21.2 percent – Needed the money
14.4 percent – Didn’t trust that Social Security wouldn’t cut benefits in the future
14.4 percent – Health reasons
Alternatively, the largest percentage of respondents who had claimed at or within 6 months of NRA cited the following as their rationale:
45.7 percent – It seemed natural to start benefits at normal retirement age
25.1 percent – Had stopped working
18.5 percent – Wanted to avoid getting a reduced benefit
14.9 percent – Didn’t want to delay any longer as there is a risk that Social Security might cut benefits in the future
Since optimizing Social Security is based in large part on life expectancy (something you cannot predict), choosing the right plan can be difficult. As noted above, some retirees feel forced to take Social Security early due to financial reasons or hardships. For other retirees that have sufficient assets and the luxury of delaying Social Security benefits until age 70, doing so can result in much larger benefits for themselves or surviving spouses later in life.
However, retirees that can afford to delay benefits often forget to consider one factor that few people ever mention - the psychological ability to spend more freely. Assuming that a retiree has established a financial plan and is on-track for their goals, delaying Social Security often results in lower spending levels. The fact is, many retirees are emotionally uncomfortable with spending their own money and portfolios while they wait for Social Security to begin, often leading to less travel and discretionary enjoyment during the early years of retirement. While no one knows what the future holds, maximizing the early years of retirement is critical since this is often a time when retirees may be healthier, more energetic and have greater financial resources. Properly coordinating Social Security benefits with this in mind can help ensure that you have the tools that allow you to enjoy retirement to the fullest extent.
Claiming Social Security is complex and many retirees fail to develop a comprehensive plan that takes all of their goals into consideration. Since everyone’s situation is unique, consider speaking to your financial adviser to determine the most appropriate approach to claiming Social Security for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.