Your Social Security benefits can be an important part of your retirement income strategy. But when should you start taking these payments?
You can begin accepting Social Security as early as 62, but your monthly checks will be much smaller than if you wait until your “full retirement age,” which will likely be between 66 or 67. And these monthly payments will get even bigger if you wait until age 70, at which point they “max out.” So, should you take your Social Security as early as possible and hope that the smaller monthly payments will be justified by the extra years of receiving them, or should you wait until you are older and hope that the bigger checks will be worth the delay?
In weighing this decision, consider the acronym LENS, which stands for Life expectancy, Employment, Need and Spouse. Let’s look at each component:
Life expectancy — If your family has a history of longevity, and if you are in excellent health, it may make sense for you to take Social Security later, when your monthly benefits will be higher. You’ll also want to consider your spouse’s life expectancy.
Employment — If you want to keep working in your “retirement years,” be aware that your earnings could affect your Social Security payments. Specifically, if you take Social Security early — that is, before your full retirement age — your benefits will be withheld by $1 for every $2 in earned income above a certain amount ($15,720 in 2015). During the year in which you reach your full retirement age, this withholding changes to $1 for every $3 in earnings over the annual limit ($41,880 in 2015). The withheld amounts could also affect spousal benefits. However, beginning the month you attain your full retirement age, benefits will no long longer be withheld based on how much you earn. Also, Social Security will recalculate your benefits at full retirement age to account for the benefits that were withheld. In any case, if you do plan to continue working, and you think you could have significant income, you’ll need to understand the effect that earnings will have on your annual benefits.
Need — In deciding when to take Social Security, here’s a key question: Do you need the money? If you can support your lifestyle for several years with alternative sources of income (such as a pension) and modest withdrawals from your investments, you may be able to delay Social Security, thereby increasing the size of your monthly payments. Be careful, though, because relying too heavily on your investment portfolio can shorten its own “life expectancy.” It’s essential that you maintain a reasonable withdrawal rate for your investments throughout your retirement.
Spouse — Your decision of when to take Social Security will affect your spouse’s survivor benefit. Surviving spouses can receive their own benefit or 100% of their deceased spouse’s benefit, whichever is greater. So, if you were to take your Social Security early, when the payments are smaller, your spouse’s survivor benefits will also be permanently reduced. If you are older than your spouse, or otherwise expect your spouse to outlive you, it might be a good idea to delay taking Social Security to maximize the survivor benefits.
As you think about when to take Social Security, look at your decision through the LENS described above. It could help clarify your options.
Craig Johnson, AAMS®
513 Oak Avenue
Sulphur Springs, TX 75482