As a federal employee, one of the biggest decisions you face when preparing for retirement is what age you’ll claim Social Security benefits.
Your choice will range from age 62, the earliest possible age you can start benefits, to delaying until age 70. Now you might be asking yourself why you would delay receiving an extra paycheck? Well, it’s because the longer you wait, the larger the paycheck gets.
Because this complex decision is a critical part of your retirement planning, this week, we’re covering the most important factor to consider when deciding when to claim your benefits.
Before we jump into the most important factor, let’s make sure we’re all on the same page. The following are key points to understand:
When Can You Start Collecting Social Security?
As previously mentioned, you can collect benefits as early as age 62. However, if you claim your benefits at 62, your benefits will be permanently reduced by roughly 6% a year for every year you’re under your Full Retirement Age (FRA).
Full Retirement Age (FRA): Your FRA is the age you’re eligible to receive your full benefit (known as Primary Insurance Amount or PIA). Your FRA ranges between ages 66 and 67 and is based on your birth year. You can find your FRA by checking the table below:
Delayed Retirement Credits: You’ll receive delayed retirement credits if you continue to delay claiming your benefits after reaching your FRA. These credits permanently increase your benefits by 8% a year for every year you wait until age 70.
Survivor Spouse Benefits: If you are entitled to Social Security benefits when you die, your surviving spouse will be eligible for a survivor benefit. The survivor benefit amount will be a function of your retirement benefit amount and when your surviving spouse claims the benefit.
Now that we’re clear on those key points let’s review the trade-offs. Taking Social Security early means you’ll receive reduced benefits, albeit for a longer period. Whereas delaying your benefits means you’ll receive fewer checks over your lifetime, but the checks will be larger.
So, the question then becomes, how long do you have to live before you receive more benefit from delaying than you would have received from taking your checks early?
The answer to this equation will be different for everyone and depend on the assumptions about investment returns and inflation rates. Yet, the most important factor in the equation is your life expectancy (and that of your spouse if married) since the breakeven point typically occurs in someone’s mid-80s, which coincides with life expectancy.
If you work with a financial planner, they’ll be able to help you estimate the best-claiming strategy for your unique situation. However, if you’re going it alone, here’s a good rule of thumb for how your life expectancy fits into the equation:
If you believe you (or your spouse) will live to at least the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you (and your spouse) are in poor health or have reason to believe neither will reach the average life expectancy, it might be a good idea to take what you can off the table.
The reason why your spouse’s life expectancy is also important is that their survivor benefit is based on your retirement benefit amount. So, by delaying, you increase your retirement benefits and your spouse’s survivor benefits.
To find your life expectancy, you can use the calculator available on the Social Security website.
A major assumption made in this article is that you have the financial means to postpone your Social Security benefits. If you don’t have the cash flow or the assets necessary to postpone your benefits, then claiming as early as possible is the obvious choice.
While investment growth and inflation rates are critically important to solving the claiming equation, the most crucial factor is your life expectancy. Because if you don’t believe that you or your spouse will live long enough to benefit from larger Social Security payments, then the other inputs in the equation matter not.
Although many may view the Social Security claiming strategy as an investment decision, it is more appropriate to think about Social Security as a form of longevity insurance. If you fear outliving your money, then the forgone early Social Security payments can be viewed as premiums paid for a larger lifetime income stream.
Finally, if you don’t feel confident creating your retirement plan, consult a fee-only Certified Financial Planner™.
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