If you're nearing retirement, you've likely paid into the Social Security system your entire career. It's only fitting that you finally cash in on the Social Security benefits that are rightfully yours. But when should you start receiving benefits — at the first available date, at the latest date or somewhere between those dates?
The answer depends on your personal circumstances and preferences. Here's some guidance to help decide what's right for your current situation.
The Social Security Administration (SSA) says you're entitled to receive 100% of the benefits based on your earnings history at full retirement age (FRA), also known as normal retirement age (NRA). The following chart provides the FRA based on when you were born:
Year of Birth
Full Retirement Age
1937 or earlier
65 and 2 months
65 and 4 months
65 and 6 months
65 and 8 months
65 and 10 months
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 and later
Source: Social Security Administration
If you were born on the first day of a month, the SSA considers you to have been born in the previous month. Therefore, if you were born on June 1, 1954, you reached your FRA in May 2020.
Timing Is Critical
Some people opt to take benefits before they reach their FRA. You can begin receiving benefits as early as age 62. In that case, the monthly benefits are reduced by as much as 25% of the FRA amount. If you don't take benefits early, the monthly benefit increases gradually until you hit the 100% amount at your FRA.
Alternatively, some people decide to wait to receive benefits until after they've hit their FRA. These people are entitled to higher monthly payouts. Essentially, benefits are increased by 8% for each year you delay taking benefits until age 70. Thus, the maximum increase for Baby Boomers with an FRA of 66 is 32% (8% × 4 years). Once you're 70, the benefits completely max out.
This creates a range of options. For instance, if you have substantial income from other sources, you may want to leave your job early and begin collecting benefits at age 62. Or you might wait until age 70 to lock in the highest monthly benefit, but this option has a major downside: If you pass away during this "waiting period," you'll never collect benefits.
Factors to Consider
Every situation is different. The following six key factors may affect your decision.
1. Accumulated wealth. Do you have enough to live on if you choose to apply for benefits early? You've probably heard horror stories about people outliving their retirement savings. When computing your monthly income needs, remember that many people spend less in retirement than they did when they were younger. Plus, if you're investing at least part of your Social Security benefits and other savings, you're putting away more money to work for you.
Your financial or tax advisor can help you compute your "breakeven" point. This depends on your benefits amount and assumptions used to account for life expectancy, taxes and investment opportunities.
2. Health status. If you have severe health conditions, you may be inclined to take benefits earlier. For example, Social Security benefits can help fill in the gap if you're forced to retire prematurely. The COVID-19 pandemic may cause some people to rethink health matters.
3. Spousal benefits. A married couple should look at benefits together. Notably, the amount of survivor benefits for a spouse who has earned little during his or her working years may reflect the record of a deceased spouse's benefit.
4. Tax consequences. The federal income tax treatment of your benefits requires a complex annual calculation. However, if you owe tax, you'll never pay tax on more than 85% of your Social Security benefits.
5. Earnings test. If you receive Social Security benefits before your FRA, benefits are reduced if you continue to work. Under this so-called "earnings test," you must forfeit $1 in benefits for every $2 earned above an annual limit ($18,960 for 2021). In the year in which you reach your FRA, the reduction is $1 in benefits for every $3 over another limit ($50,520 for 2021). This is for months prior to attaining your FRA. Starting with the month you reach full retirement age, your Social Security benefits won't be reduced, no matter how much you earn.
6. Legislative changes. The Budget Bipartisan Act of 2015 ended the following popular strategies for certain married couples:
The file-and-suspend strategy, which allowed a higher-earning spouse to first apply for benefits at FRA and then suspend them, thereby earning Social Security credits until age 70. In the meantime, the lower-earning spouse would claim benefits based on the higher-earning spouse's earnings history.
Under the restricted application strategy, a spouse who was approaching FRA could file a restricted application for spousal benefits only. Then, the spouse would wait until age 70 to apply for benefits based on his or her own history. This enabled the spouse's Social Security credits to continue to grow.
Both techniques are no longer available, but people born before January 2, 1954, can still use the restricted application strategy.
Important: If you apply for Social Security benefits at a reduced rate, you can choose to pay back what you've already received. Then you can restart benefits later with a higher monthly rate. But you're only allowed one such withdrawal during your lifetime.
What's Right for You?
There are many issues to factor into your decision, so it's important to look beyond online calculators for guidance. Contact your financial or tax advisor to discuss the optimal time to start taking Social Security benefits based on your current situation.
EHTC is a dedicated, full-service CPA firm in West Michigan that focuses on helping clients to achieve their full potential through comprehensive accounting, finance and tax services. We are a local firm with large firm resources, using a team approach to proactive client service that helps our clients gain a competitive advantage through our ability to develop strategies and present realistic solutions that build value.