Deciding When to Start Receiving Social Security Benefits (Part 1)

Workers can generally begin receiving monthly Social Security retirement benefits once they reach the age of 62, but the full benefit amount is permanently reduced for each month benefits are received before full retirement age (“FRA”). On the other hand, the full benefit increases if an individual delays receiving benefits until after the FRA.

A worker’s FRA depends upon. his/her birth date as follows:

FRA is age 66 for workers born after 1942 and before 1955;

FRA is age 67 for those born after 1959; and

FRA gradually increases from age 66-67 for those born after 1954 and before 1960.

Tax and legal professionals with clients who are approaching age 62 may wish to discuss with them the various benefits and drawbacks to taking Social Security benefits before, at and after FRA.

Key Considerations

If an individual lives to average life expectancy for someone his or her age, the present value of the Social Security retirement benefits he/she receives will usually be similar regardless of when benefits begin, so the decision regarding when to start receiving benefits often depends upon factors other than trying to receive the greatest lifetime benefit from Social Security. Some individuals delay retirement and continue to work because of personal preferences. Others need to take early Social Security benefits because they are unemployed, underemployed or have an immediate financial need. Those in a better financial situation might be able to delay receipt of benefits, allowing their monthly benefits to in CCSC.

With the exception of those who reach age 62 and need income or those with a shorter life expectancy, most workers should carefully consider the long-lasting advantages of waiting until their FRA to receive their Social Security benefits. A number of factors must be taken into consideration when making this decision.

Life Expectancy

An individual’s life expectancy may be the biggest factor in deciding whether to start benefits carly. Life expectancy tables and averages are available, although an individual’s current health and parents’ longevity should also be factored in. As a general rule, if an individual reasonably expects to reach age 80, waiting to take benefits until he/she reaches FRA may be a wise choice.

Shortening the Retirement Period 

A significant factor in retirement planning projections is the length of the retirement period. For example, if an individual wants to retire at age 62 and has a life expectancy of 85, a 23-year retirement period must be funded. By working past age 62, an individual shortens the retirement period and decreases the resources needed to fund his or her retirement, regardless of longevity.

Replacing Lower-Wage Years

An individual’s Social Security benefits are based upon his or her primary insurance amount (“PLA”). The PLA is calculated using an individual’s highest 35 years of indexed earnings. If an individual can replace lowerwage years with higher-wage years after age 62, the PLA can be increased. This can lead to a greater benefit when the individual retires.

Inflation Adjustments

Social Security benefits are subject to an annual inflation adjustment. By taking early benefits, an individual’s starting base for annual adjustments is smaller. For example, an individual with a PIA of $2,000 who begins benefits at age 62 will receive only $1,500 per month and will miss out on the compounded inflation adjustment for the $500 in lost benefits.

Deciding When to Start Receiving Social Security Benefits, Part 1

Spousal Benefits

When a worker reaches FRA and begins taking benefits, his or her spouse also becomes eligible for spousal benefits equal to 50% of the working spouse’s PIA. A spouse may need to rely upon spousal benefits if he or she has no history of personal earnings or if his or her PLA is less than 50% of the working spouse’s. If the working spouse takes early benefits, the reduction in his or her PIA also affects the spousal benefit amount.

The Earnings Test

An individual’s reduced early retirement benefit may be reduced even further between age 62 and FRA if he or she takes early benefits and also continues working. Individuals who intend to keep working beyond age 62 must consider the impact 9f the carnings test, which reduces benefits by S1 for every $2 in carnings above an exempt threshold (S15,120 for 2013) during years the individual has not yet reached FRA.

Any reduction due to the earnings test is later recouped because benefits at FRA are increased to take such reductions into account.

Charlie begins receiving Social Security benefits in 2012 at age 63. In 2013, he works part-time and earns wages of S16,120, which is $1,000 over the exempt amount. Charlie is in the 25% marginal tax bracket (because of additional taxable income), and 85% of his Social Security benefits are included in his Charlie’s benefits are reduced S1 for each S2 he earns over the exempt amount. Charlie’s additional spendable portion of the additional $1,000 in earned income after considering taxes and the loss of Social Security benefits is only $279, calculated as follows:

-Earnings over the exempt amount: S1,000 -Social Security/Medicare tax on $1,000 (7.65%). (77)

-Income tax on S1,000 (25% marginal tax bracket): (250) -Loss of Social Security benefits (S1,000/2): (500) -Tax savings from $500 reduction in benefits (S500 x 85% x 25%). 106 Additional spendable amount: S279

In the next issue, we will discuss the following:

-Advantages of Taking Reduced Benefits at Age 62;

-Advantages of Taking Delayed Benefit after Reaching FRA; and

-Strategies for Increasing Retirement Benefits.