Are you wondering when to take Social Security? The answer is a little more complicated than it seems. Officially, you can start your retirement benefit at any point from age 62 up until age 70. Your benefits will be higher the longer you delay taking Social Security.
But perhaps Social Security is something that none of us should rely upon in retirement. After all, the system is underfunded by about 30%. The eligibility age will likely have to be raised or benefits will likely have to be cut to make the system whole.
Mentally, I’ve never counted on Social Security being there for me. Instead, I’ve been focused on the new three-legged stool in retirement: personal pre-tax retirement accounts, personal taxable retirement accounts, and personal hustle. In other words, the three legs all consist of you supporting yourself.
It’s very hard to count on the government for retirement support when the government has a difficult time managing its own budget. Further, the government is always changing who is eligible for benefits and who isn’t. Therefore, focus on what you can control.
As a personal finance writer since 2009, I believe the best age to take Social Security is at age 66. Now let me explain my rationale.
How Much Do We Pay In Social Security Tax?
Despite my pessimism about our nation’s retirement system, it’s a good idea to have a framework for when to start collecting benefits anyway. I’m confident all of us will eventually receive some sort of national retirement benefits. If the government decides to fully break its Social Security promises, there will be a national revolt.
Make no mistake about it. Social Security is our money. In 2021, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $142,800 (up from $137,700 in 2020). The maximum income amount for Social Security tax tends to go up about 2% a year.
In other words, if you make $142,800 in 2021, your maximum FICA tax will be $8,853.60. But don’t forget. You also have to pay a Medicare tax rate of 1.45%. Therefore, your total FICA tax rate is 7.65%. 7.65% X $142,800 = $10,924.20. If you are self-employed, you have to pay double (15.3%).
Given how much we pay in FICA tax each year, all of us have a right to eventually collect Social Security. If the government didn’t charge us a Social Security tax each year, we could invest the money, use the money to save up for a down payment on a house, or spend it to live a better life.
When To Take Social Security
The three main factors that determine when to take Social Security are:
- Health And Life Expectancy
- Financial Situation
- Marital Status And Age Difference
There are no certainties for when to collect in order to receive the highest benefits over your lifetime. However, there are some general rules most of us can follow to increase our chances of getting the highest benefits possible.
Delay If You Are Healthy
If you are in great health at age 62, then it’s best to delay Social Security. If you are a single person in poor health, you should file for Social Security benefits as soon as you are eligible.
For every year you delay taking Social Security, you’ll get an extra 2/3 of 1% for each month after your birthday month. This adds up to 8% for each full year you wait until age 70. Actuarially, it’s financially more beneficial to start taking Social Security between 68 – 70.
The full retirement age for Social Security benefits is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born in 1960 or later, full retirement benefits are payable at age 67. The IRS has a whole PDF about our nation’s retirement benefits.
Once you reach full retirement age, the delayed benefits start accruing at the beginning of your birth month. For example, if you were born on February 18, you’d reach your full retirement age on February 1. If you wait until April to take your benefits, you’ll get 101.4% of your full retirement benefit. Wait one year and you’ll get 108% of your benefits.
You can earn delayed credits until age 70, when you’d receive 132% of your full retirement benefit. For example, if you’d receive $1,500 per month at your full retirement age of 66, delaying your benefits to age 70 would boost your monthly check to $1,980.
Delay If You Are Financially Secure
Let’s say you retire a 401k millionaire at age 62. You are also very healthy. In such a scenario, delaying Social Security at least until the full retirement age of 66 will likely result in more Social Security benefits over your lifetime.
Early retirement, according to the government, is retiring before age 66. Therefore, your Social Security benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.
For example, if you elect to take Social Security at age 62, you will only receive 75% of full benefits. Therefore, it may be good for most financially savvy people of average-to-good health to wait until at least the full retirement age to start receiving Social Security.
The IRS has a nice reduced benefits table here. Remember, once you elect to take Social Security benefits, you’ve locked in your Social Security benefits plus cost of living adjustment for the rest of your life.
Taking Social Security When You’re Married Or Single
Here’s where deciding when to take Social Security gets a little tricky. First of all, know that if you die single and childless, all the Social Security you would have received after age 62 will go to nobody. Unlike a will or revocable living trust, the government doesn’t pay out your Social Security benefits to someone of your choice. The government simply smiles and reabsorbs your money. I’m not sure why there is not a bigger objection given it is our money.
Therefore, before you die, you may strategically want to get married to someone to protect both of your Social Security benefits. It’s too bad the government is not more magnanimous with survivors benefits. How amazing would it be to designate your survivors benefits to a charity you really care about.
Like potentially eliminating the stepped-up basis, the government reabsorbing your Social Security payments if you die single and childless are signals to lookout for yourself in retirement.
Joint Life Expectancy Calculations
The second thing to know about Social Security when married is your joint life expectancy. When couples are planning for retirement or annuity payments, they often use a joint life expectancy in which they take the life expectancy of their partner (who may become the beneficiary) into account as well.
The longer your expected joint life expectancy, the more beneficial it is to delay filing for Social Security and vice versa. For example, if your spouse is 15 years younger than you, your joint life expectancy will likely be longer. Here is a joint life expectancy calculator by the SSA. Despite making actuarial calculations, there’s still no guarantee about the best time to take Social Security for each spouse. Everything is just a guess.
Then there is a situation where there is a higher earning couple and a lower earning couple. In general, it is recommended the higher earner delay until 70, health permitted, and the lower earner file sooner for Social Security. When the higher earner delays benefits, it increases the amount of benefits the couple gets so long as either partner is alive. Further, waiting increases the person’s own retirement benefits and the survivor benefits, if the lower earner would outlive the higher earner.
For the lower earner, if either partner is in poor health, it’s better to file for Social Security earlier. The lower earner is thinking about how long it will be before one spouse has died. The higher earner needs to estimate how long it will be before both spouses will die.
How To Calculate the Break-Even Age for Taking Social Security
It’s always good to use a numerical example to calculate when it’s best to take Social Security. I’ll use myself as an example. Let’s pretend I’m single.
The year is 2043, and I have reached full retirement age 66. I’m deciding whether to begin collecting benefits now or to delay for one year.
If I collect now, I’ll receive $2,800 per month. But if I wait one year, my benefit increases by 8% each year until age 70. In other words, if I wait one year, I’ll receive an additional $224 a month in Social Security benefits. If I decide to wait a year to collect, how long would it take me to break even?
By delaying one year, I’m forfeiting $33,600 ($2,800 X 12), but gain $224 a month. To find out my break-even age, I would divide $33,600 by $224 a month, which comes out to 150 months or 12.5 years. In other words, if I wait one year, it will take me 12.5 years to break even. The math 12.5 years to break even for you too if you wait a year.
12.5 years is a damn long time to wait at an already advanced age to break even. I would have to confidently believe I will live past 78.5 years old (12.5 years + 66 years) to break even. If I was in average-to-good health, it’s likely a safe bet to delay. For example, let’s say I live until 96. Then I would come out ahead by $47,040 ((96 – 78.5) X 12 X $224).
To delay taking Social Security for two years until age 68 is likely the most I would delay. My break even point would be a little more than 13.5 years, or 79.5.
Create A Social Security Bridge
If you get laid off or retire before full retirement age, consider creating a Social Security Bridge to last you until full retirement age. Your Social Security Bridge can be your robust tax-advantageous retirement plans or your taxable investments spitting out passive income.
Below is a base case framework for how much you should target in taxable and pre-tax accounts by age. By age 60, shoot to have $1 million in your 401k or IRA and $3 million in taxable accounts. This way, you should have no problem waiting until full retirement age to collect Social Security.
Even if you don’t have a large 401k or a significant passive income portfolio, you can carve out a portion of your investments as your Social Security Bridge. These investments should be relatively low risk in nature. Think municipal bonds, treasury bonds, CDs, and money market accounts. The Social Security Bridge idea is most applicable for single people.
If you are married, you could always use your spouse’s Social Security benefits as a bridge. In other words, staggering when to take Social Security is a common strategy.
The Best Social Security Withdrawal Age
I’ve concluded if we are in average-to-good health, we should wait until full retirement age (66) to take Social Security benefits. The next best ages to collect are 65, 64, 63, 62, 67, 68, 69, 70.
Our life expectancy is generally getting longer. With proper dieting, regular exercise, and continued advancements in healthcare and science, I’m hopeful the majority of us will live beyond our 80s.
However, I still don’t recommend waiting until age 70 to collect Social Security given the incredibly long break-even period. You would have to be confident you will live past 83 to delay collecting until 70.
Can you imagine paying FICA tax for 48 years after college and then dying the year you want to collect Social Security?
The time value of money is real and important to take into consideration. Use the Social Security money to live a better life while you are younger and probably healthier. Health deteriorates at a faster rate the older we get. And when we get ill at an older age, we tend not to recover as quickly or recover at all. Your quality of life matters.
It’s easy to say the best age to take Social Security is at full retirement age. However, I’ll see how I feel at age 62 or whenever I’m eligible if the government changes the rules. After paying FICA tax for decades, it will probably be too tempting to delay much longer.
Each Social Security payment I get will feel like a relief that I’m finally getting some of my money back. And the more payments I get, the happier I’ll be.
Get Life Insurance Before It’s Too Late
One of the most striking things I’ve discovered during the pandemic is this chart below. It shows a huge drop off in the pace of retirees collecting Social Security in 2020 and 2021. One would think that with millions of people losing their jobs, more people would have collected, not less.
However, the sad reality is that most of the COVID-19 deaths occurred in people over 65. As a result, the pace of retirees collecting SS declined. Can you imagine waiting until full retirement age to collect only to die a year before?
PolicyGenius enabled my wife to double her life insurance coverage (match mine) for less money during the pandemic. As co-parents with equal business responsibilities, it only made sense to get equal life insurance coverage.
Readers, when do you think is the best age to take Social Security? How do you incorporate Social Security as part of your retirement plan? Do you think the government will raise the full retirement age or cut benefits soon? When did you take Social Security and why?
Note: For 2021, the maximum Social Security benefit is $3,148 a month for an individual who claims at full retirement age. The maximum benefit if claimed at age 70 is $3,895 in 2021. These figures will likely go up between 1-2% each year to keep up with inflation.