Social Security Benefits: Making the Right Decision

When should you begin taking Social Security benefits?

The question seems straightforward enough. But the right time to start taking advantage of this important source of retirement income is often difficult to determine. You can start collecting Social Security once you turn age 62. In general, the later you start, the greater your benefit payment.

                          Source: Social Security Administration

Once you reach “full retirement age,” also called “normal retirement age,” you’re eligible to receive full Social Security benefits, However, should you decide to take benefits later, they would increase roughly 8% a year between full retirement age and age 70 (the exact percentage depends on the year you were born).

In previous years, those 62 and older could file for Social Security early, receive lower Social Security benefits for up to eight years, and decide at age 70 to repay those benefits– without interest. Then they could begin collecting the higher amount that they would have received if they had elected to wait until age 70.

That’s no longer the case. Today, instead of eight years, you have only 12 months to change your mind about taking early benefits after filing for them.

The Cost of Filing Early

Leaving the workplace before your full retirement age means your benefits will be reduced by about 0.56% for every month between your retirement date and your full retirement age. After 36 months, the reduction drops to about 0.42% per month. For example, if your full retirement age is 66, you’ll receive about 25% less if you retire at 62 – and you will not be eligible for a benefit increase once you reach full retirement age.

For example, let’s suppose that you are turning 62 this year and are thinking about taking Social Security early. If you waited until your full retirement age of 66, your benefit would be $2,300 a month in today’s dollars. At age 62, however, your monthly benefit would be $1,725; if you waited until age 70, your monthly benefit would be $2,852.

If You Keep Working

Continuing to work while taking Social Security could reduce your benefits significantly. Let’s say your full retirement age is 66 plus 8 months. Until you reached age 66, you would give up $1 of your annual Social Security benefits for each $2 you earned above $14,160. For the first 8 months of the year in which you turned 66, $1 in benefits would be deducted for every $3 you earned over the annual limit. After that, though, your earnings would not affect your benefits.

When considering when to take Social Security, you should also factor in your spouse’s situation. Your spouse will receive either 50% of your benefit or his/her calculated benefits – whichever is greater.

Additional issues you may want to consider include:

—When is your “break-even” age – the point at which it would be better to wait and take the larger retirement benefit?
—Do you really need to collect early to make retirement affordable?
—If you worked longer, would your Social Security benefits increase?
—Will Social Security even be around when you retire?

Breaking Even

To determine your break-even age, you need to know the age you would need to reach before the cumulative payments of waiting are greater than the amount you would have collected if you’d filed early. Let’s say you qualify for full retirement benefits of $2,300 at age 66. The various break-even points are illustrated below.

                          Sources: Forefield, Contango Analysis

This chart assumes that you are not taking Social Security early and investing the benefits but instead are actually using the money. If you did invest the excess profitably, your break-even point would move out a few years depending on your rate of return.

As you can see, you would benefit by taking retirement at age 62 at a smaller amount all the way up until age 77. At age 77, the cumulative payments of waiting until full retirement age would be greater than the total payments you would have received if you’d begun collecting a lesser amount at age 62. At age 86, the cumulative payments of waiting until age 70 to receive benefits are greater then cumulative benefits received at age 66. As a general rule, the first break-even point is typically 11 to 12 years after full retirement.

Once you have determined the break-even points, the next step is to consider the probability that you’ll live beyond the break-even age. Of course, no one can predict exactly how long he or she will live. But by taking into account your current health, diet, exercise level and family health history, you might be able to make a reasonable assumption. Remember that life expectancy is constantly going up and the likelihood that you or your spouse will reach the first break-even point is high.

Personal Considerations

Sometimes taking benefits at age 62 is the right move for personal, rather than financial, reasons. If you are committed to leaving the workplace before reaching your full retirement age, then you may be more than willing to exchange your full benefits for the ability to retire early.

Maximizing Benefits

Social Security benefits are calculated based on your 35 highest earning years. If working longer would increase your 35 highest earning years, the potential of long-lasting higher payouts might encourage you to stay in the workplace.

In most cases, waiting until full retirement age produces a better long-term financial outcome. Before you decide what is best for you, we recommend that you weigh the facts, do the math, and assess your personal situation.

SIDEBAR: Social Security’s Future

The US government projects that if nothing changes in the way Social Security is currently structured, by 2036 Social Security will be paying out more money than it is taking in and funds would be quickly depleted. Benefits would not be completely eliminated, but they would need to be reduced to roughly 75% of their projected amounts to be sustainable. Increasing the Social Security wage limit or increasing full retirement age for younger individuals are two of the steps that could help avert this situation. Only time will tell if such steps are taken.

Eric Jacobsmeyer, CPA/PFS, CFP, Wealth Planning Strategist, Contango Capital Advisors (

Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of amount invested.

The information contained in this article is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA0511-0085

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