Social Security is a little like the Internal Revenue Service. If you try to understand every detail you will get so caught up in the minutia that you could get overwhelmed. On the other hand, if you can simply grasp the Social Security basics you are well on your way to having a grip on how Social Security works and therefore what decisions you should be making. In this post, Part One, I will highlight the basics of Social Security and then discuss the things you should consider when deciding when to start drawing your benefits. Part Two will go into more detail about some little known strategies to help you maximize your Social Security benefits.
Social Security Basics Overview
You can’t start before age 62, but the longer you wait to start, the larger your benefit will be. Full benefit is considered age 66 for those born between 1943 and 1954. Starting at age 62 will permanently reduce your benefit to 75% of what you could have drawn by waiting until age 66. And you can increase that another 8% per year if you keep waiting after age 66 up to age 70. For example, if your full benefit is going to be $1600 monthly at age 66, it will be 75% of that amount ($1200 monthly) by starting at age 62 or up to about $2176 per month by waiting until age 70. Note: these numbers do not include the annual cost of living adjustments, but those will be added to your benefits whether you start or wait.
How Does Spousal Benefit Work?
The lower earning spouse has a choice: to claim a “spousal" benefit of 50% of the spouse’s benefit or to claim the earned benefit as shown on the Social Security report received in the mail each year. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit, like the earned benefit described above, will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.
What About Survivor Benefits?
A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:
- The survivor must be full retirement age. If not, the benefit will be reduced based on age.
- If the survivor is insured on her own record and if the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.
Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.
Should I Start Early or Wait?
There is no “one fits all" answer, but these factors all affect your decision:
- How much savings do you have? Assuming you need to start tapping those savings when you retire, the earlier you retire, the bigger the nest egg will need to be. Besides, the decreased benefit of starting earlier will mean that you need more per year from these savings. Ideally, you would only tap the growth of your savings, leaving the nest egg alone. Will this fit your budget? Answer this question clearly before accessing your benefit.
- How is your health? I know this sounds morbid, but if you have good cause to believe you won’t live well into your 70’s, you may consider starting your benefit early. You don’t want to NOT tap into needed money if you seriously believe that waiting will cause you to miss out on the benefit
- Do you have other income streams? Remember: Social Security is meant as a supplemental income. Do you have other retirement checks coming in?
- Do you love your work? If so, keep on working. There is no reason to stop doing what you love just to start a benefit at a reduced rate.
There: you have some basics of Social Security and some things to think about if you are considering starting your benefit early.