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When should you start Social Security?

August 20, 2021

When should you start Social Security?

Social Security is and probably will remain one of the most misunderstood topics in financial planning. The dangerous part about that is that Social Security, and specifically the decision of when to elect your benefit is something that affects almost everyone. On top of that, making the wrong decision can have implications for you and your spouse throughout your entire retirement. On the blog today we're going to discuss some key things to consider when it's time for you to make your decision on Social Security.

Should I take it early?

Very often I hear from people that they plan to start to take their Social Security as soon as possible. For folks that are still working this is almost always a bad idea. The reason is that if you elect your benefit early, and earn over a certain threshold ($18,960 in 2021) your Social Security will be penalized. What that means is that for every two dollars you earn above the threshold your Social Security check will be reduced by one dollar. So if you are still working, and you earn $50,000 per year, and you decided to take Social Security early you are looking at having your benefit reduced by more than $15,000! There are some caveats to this, it works a little bit differently in the year that you will reach full retirement age, but the general premise is - if you are earning income and your draw your Social Security early you may be penalized based on your earnings amount.

How about waiting until Full Retirement Age (FRA)?

Full Retirement Age or FRA in "Social Security speak" is the age at which you can collect your full benefit. Keep in mind that delaying beyond your FRA will still allow your benefit to grow, but more on that later. Full Retirement Age varies depending on when you were born. For those born in 1954 and earlier, FRA is age 66. From there it begins to phase back to age 67 depending on the year you were born. Anybody born in 1960 or later has a Full Retirement Age of 67. If you are between 1954 and 1960 FRA is going to be 66 and some number of months depending on the exact year. Once you have reached FRA your Social Security will no longer be penalized for working. If you are retired or retiring at around this time most folks will elect their benefit, however there are some other things to consider as well. 

Why would I defer beyond FRA?

Each month that you wait to start your benefit allows the amount of your benefit to grow. This is true up until age 70. Once you reach 70 the benefit no longer increases and you need to start to draw from your Social Security. As to whether or not you should take it earlier, or wait until your maximum benefit - well you've got some things to consider. How is your health? If you are healthy and anticipate living a long time it might make sense to defer in hopes of drawing a larger check for a longer period of time. If you have great longevity in your family you should also consider waiting. On the flip side - if your health is not great, it might make sense to draw early and start receiving a benefit sooner. The next thing to consider is to work out the math. In most circumstances whether you take it early or wait to receive a larger check your breakeven point is going to be in your early 80's. What I mean there is that taking a smaller check earlier but then being locked into that smaller amount will give you a "head start" on how much you have drawn out of the system by age 70 for example. However, waiting until age 70 means a larger check each month from that point on. The question on the math becomes - how many larger checks do I need to draw to catch up with the fact that I waited until age 70 to start receiving benefits.

How do I decide?

At the end of the day you will need to make a decision and you won't be able to fill in all the variables before doing so. Since none of us know how long we're going to stick around you won't be able to know if you made the proper decision until many years after you make it. As a result you've got to make the best decision you can based on some of the factors we just discussed. If you've got more questions about your specific situation feel free to get in touch, we look forward to helping you! 

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