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Q: When should I file for Social Security benefits?

Oh, how I wish I had a magic wand, because this straightforward question is among the hardest to answer. In fact, the entire Social Security system, which is intended to be fair and accessible, is mind-numbingly complex. The unfortunate result is that many retirees lose out on valuable benefits, generally because they choose to start to collect too early. So listen up.

The Basics

Most people are eligible to start collecting Social Security benefits at age 62. But if you wait until what the Social Security Administration calls your full retirement age (FRA), which is 66 for those born between 1943 and 1954, you’ll get a larger monthly benefit, known as your primary insurance amount (PIA).

Smart Move: If you were born before 1943 or after 1954, find your FRA on the Social Security Administration’s website, socialsecurity.gov.

After you reach your FRA, your monthly benefit will continue to increase until you reach age 70—at which time you max out. The rationale is clear: You can get a smaller payment for a longer amount of time or a larger payment for a shorter amount of time. In theory these two balance out over time, at least when looking at data for millions of people. But when you’re thinking about what’s best for one person or one couple, the averages don’t apply. Once you understand how the system works, you are in a position to make the best decision for your own situation.

Caution: The term full retirement age can be misleading. In general, your benefits will continue to increase until age 70.

What the Numbers Tell Us

A comprehensive study by economists John Shoven of Stanford University and Sita Slavov of Occidental College identifies the conditions when it is most advantageous to delay Social Security benefits. They conclude that gains from delaying are greatest:

  • When interest rates are low
  • For married couples relative to singles
  • For single women relative to single men
  • For two-earner couples relative to one-earner couples
  • For a married couple, deferring the primary earner’s benefit as compared to deferring the secondary earner’s benefit.
Caution: Unless you’ve already filed for Social Security, you need to enroll in Medicare when you turn 65 (there’s a seven-month window, starting three months before your 65th birthday). Otherwise your medical and prescription drug coverage could be delayed, and you could face a penalty in the form of higher premiums. See Question 35 for details.

Think About Your Life Expectancy

According to the Social Security Administration, the typical 65-year-old today will live to age 83, one in four will live to age 90, and one in ten will live to 95. Women have a slightly higher life expectancy than men, and the odds are even better that one person in a married couple will outlive the averages.

Then consider that for a person born between 1943 and 1954, delaying the start date from age 62 to age 66 increases benefits by 33 percent. Delaying to age 70 results in an increase of 76 percent.

A break-even analysis shows you how long you have to live to increase your overall benefit. For example, let’s say that you’re entitled to a $1,000 monthly benefit at age 66. If you start collecting benefits at age 62, your monthly draw will be reduced to $750. If you hold off until age 70, your monthly benefit will increase to $1,320. Take a look at the following chart.

Lifetime Social Security Benefit

Begin Age 62

Monthly Benefit $750

Begin Age 66

Monthly Benefit $1,000

Begin Age 70

Monthly Benefit $1,320
Live to age 70 $72,000 $48,000 0
Live to age 75 $117,000 $108,000 $79,200
Live to 78 $144,000 $144,000 $126,720
Live to age 80 $162,000 $168,000 $158,400
Live to 83 $189,000 $204,000 $205,920
Live to age 85 $207,000 $228,000 $237,600
Live to age 90 $252,000 $288,000 $316,800
Live to age 95 $297,000 $348,000 $396,100

As these numbers show, if our 62-year-old lives beyond age 78, she will collect more by postponing the start of benefits to age 66. If she lives to age 83, which is the national average, she will collect the most by postponing her start to age 70.

Of course you can’t predict how long you will live. But if you’re healthy and longevity runs in your family, most likely you’ll increase your lifetime benefit by postponing your start date.

Look Before You Leap! According to the Social Security Administration, almost three-quarters of eligible workers file for benefits before their FRA. Before you file for Social Security benefits, be sure to calculate your benefits over your anticipated life span. Otherwise you could be losing out, big-time!

Think About the Current Interest Rate Environment

Every year that you delay collecting Social Security between the ages of 62 and 70, your monthly benefit will increase between 623 and 813 percent. If you were born between 1943 and 1954, and your FRA is 66, the numbers look like this:

Delay Benefit Increase
Age 62–­63 6.66%
Age 63–­64 8.38%
Age 64–­65 7.6%
Age 65–­66 7.2%
Age 66–­67 8%
Age 67–­68 8%
Age 68–­69 8%
Age 69–­70 8%
Beyond age 70 None

Now compare these rates against the return you could get from a risk-free investment like U.S. Treasuries or an insured savings account. Clearly, the lower the prevailing interest rates, the more you stand to benefit over the long run by delaying Social Security. This is particularly true when you think about what economists call “real” interest rates, or the rate you earn after inflation.

As an example, let’s say you’re 64 and trying to decide whether to tap into your 401(k) savings or collect Social Security. If part of your 401(k) is invested in Treasuries, in 2013 you’re effectively earning no interest after inflation. You’ll get a better return by withdrawing those funds and allowing your Social Security benefit to grow.

Or let’s say that you’re considering buying a commercial annuity that will pay you for life. By instead choosing to delay Social Security, you are in effect buying an inflation-adjusted annuity from the U.S. government. The primary difference is that you most likely get a better rate. The lower the prevailing interest rates, the better the deal.

However, when the economy recovers and interest rates rise, this may not be the case. Shoven and Slavov conclude that delaying Social Security is most advantageous when real interest rates are 3.5 percent or lower.

Think About Your Income from Other Sources

If you don’t have enough savings and are dependent on Social Security income to pay for necessities, you may have no choice but to collect Social Security as soon as you can. But if you have savings or income from other sources, and can afford to postpone your start date, you will likely benefit by delaying.

Also realize that if you file for Social Security benefits before your FRA but you continue to work, and your earnings exceed certain limits, part of your benefit will be temporarily withheld. In 2013, if you file for benefits at age 62, $1 in benefits will be withheld for every $2 you earn above $15,120. In the year you reach your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $40,080. Once you reach your FRA there is no earnings deduction, and you will get the money previously withheld in the form of a higher benefit.

At a Glance: Social Security Retirement Benefits
Recipient Amount
Worker at least 62 but under FRA Reduced primary insurance amount (PIA), the amount you would receive at your FRA
Worker at FRA 100% of PIA
Worker older than FRA Increased beyond PIA
Spouse, under age 62 No benefit
Spouse, age 62 to FRA 50% of PIA, reduced
Spouse, at FRA 50% of PIA
Spouse, at any age, caring for a child who is under age 16 or disabled 50% of PIA
Unmarried child under age 18 or any age if disabled before age 22 50% of PIA, subject to family maximum

If You’re Married, Compute Your Combined Benefit

This is where Social Security gets really tricky. As an individual, you try to maximize your lifetime benefit. But as a couple, your goal is to maximize your combined benefit over both of your lifetimes as well as survivor benefits. This involves analyzing your personal benefits as well as the potential to take advantage of spousal benefits.

Basic Rules for Spouses

  • As a spouse, at age 62 you can choose to take a benefit based on your own earnings or a spousal benefit based on your spouse’s earnings. The only caveat is that to receive the spousal benefit, your spouse must have already filed.
  • The spousal benefit is up to 50 percent of the earner’s benefit. The actual percentage depends on when you both file; if you both wait until FRA or later, you collect a higher benefit. For example, if a husband files early at age 62, his benefit would be reduced by 25 percent. If his wife waited until FRA to file for a spousal benefit, she would collect 50 percent of his reduced benefit. However, if the wife decided to take spousal benefits at age 62, her benefit would be reduced even more to 35 percent of his reduced benefit.
Smart Move: A husband or wife maxes out their spousal benefit (50 percent of spouse’s benefit) at FRA. There is no benefit to waiting longer.
  • The impact on survivor benefits is similar. At FRA a widow or widower can collect up to 100 percent of their spouse’s benefit (or a reduced benefit starting at age 60). When someone opts to collect benefits early, his or her surviving spouse will also collect a reduced benefit. Conversely, when a person decides to delay benefits, he or she is providing their survivor with a larger benefit. See Question 34 for more details on Social Security benefits for surviving spouses.

If you are divorced but were married for at least ten years and are currently unmarried, you can still collect a benefit based on your ex’s record. See Question 32 for more details.

Unfortunately, unmarried couples don’t have spousal rights under Social Security. See Question 9 for more.

Social Security Strategies for Spouses

Working as a team, spouses have some choices that can significantly boost their combined benefit.

A warning, though: These types of strategies can get very complex, and their effectiveness depends on a number of variables, including the difference in ages and earnings records between the two spouses.

With the first strategy, sometimes called the “62/70 split,” the lower-earning spouse takes Social Security as early as age 62 and the higher-earning spouse postpones filing until age 70 to maximize his or her benefit. With this scenario, the higher earner has the option of receiving a spousal benefit as a bonus during the years that he or she is waiting to claim on his or her own record.

Alternatively, the higher earner could file for benefits at FRA and immediately suspend them. This strategy, known as “file and suspend,” allows the lower earner to collect a spousal benefit based on the higher earner’s record, potentially getting more than they receive on their own, while the higher earner’s benefits continue to grow. The higher earner then collects once their benefit has maxed out. A few notes on file and suspend:

  1. You must be at least at your FRA to file and suspend.
  2. Either spouse can file and suspend, but not both.
  3. By suspending, you are not eligible to collect a spousal benefit.

The only way to determine if either of these strategies will work for your family is by crunching the numbers. Unless you are extremely facile with Excel spreadsheets and financial modeling, it is best to work with a financial advisor as you make your determination.

Talk to an Expert: If you’re married and want to maximize your joint Social Security benefits, I highly recommend that you consult with a financial advisor who has in-depth knowledge of the Social Security system.

Think About Your Tax Situation

What Uncle Sam gives, he also takes away in the form of taxes. Regardless of when you retire, up to 50–­85 percent of your Social Security income may be taxable if your modified adjusted gross income (MAGI) reaches certain levels. There is nothing to be done about this; simply be aware that your Social Security benefit may bump you up to a higher income tax bracket. (This could be another reason to delay.) See Question 25 for more about taxes in retirement.

Bottom line? The most common error people make when it comes to Social Security is starting to collect their benefit too early. Yes, it’s tempting to take the money and run. But before you do, carefully weigh your options. On further scrutiny, you are likely to find that you will get the best return on your money by postponing and allowing your monthly draw to increase.

Consider taking benefits early if: Consider taking benefits later if:
You’re not working and can’t make ends meet. You’re still working and make enough to impact the taxability of your benefits.
You are in poor health. You are in good health and longevity runs in your family.
You are the lower-earning spouse and your spouse can wait to file for a higher benefit. You are the higher-earning spouse and want to be sure that your surviving spouse receives the highest possible benefit.

Part IV: Maximizing Social Security and Medicare, Question 30

Additional excerpts

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