Timing Your Social Security Benefits

If we knew exactly when we were going to die, timing our Social Security benefits would be a piece of cake.

I hear all kinds of excuses for taking Social Security early but I’m not sure they make sense financially. Most people claim Social Security is going to run out of money so they want to get what they can while they can. To be clear, Social Security’s combined funds that pay retirement, disability and family benefits will be able to pay scheduled benefits until 2034. Granted that’s only 10 years away however, I can promise you this program will be restructured long before it runs out of money simply because nearly one half of all retirees receive all of their retirement income from Social Security. If this program shuts down, we will have another Civil War. Will Social Security look different in the future? Yes. I believe it will. But it’s not going away.

We are eligible to take reduced benefits as early as age 62. Your full retirement benefit is reduced by 30%. If you are eligible for $1,000/month at your full retirement age, you will receive $700/month at age 62; a $3,600 cut annually. Seems like you’re leaving a lot of money on the table.

Here’s something else to consider. A lot of people think they are going to cheat the system and double dip meaning, they are going to keep working and collect their Social Security benefits too. That’s not going to work. The Social Security Administration caught onto that game a while ago and now limits how much money you can earn before your benefits are reduced even further. In 2024, you will lose $1 of Social Security benefits for every two dollars you earn above $22,320. On top of both reductions, if you are single and earn more than $34,000 you will also owe income tax on up to 85% of your Social Security benefits. If you are married and your combined income exceeds $44,000 you will owe income tax on up to 85% of your Social Security benefits. Yes! You will pay a tax on a tax! Ugh! Guys is this what you worked for?

Maybe it makes sense to wait until full retirement age. You won’t get out of paying tax on up to 85% of your benefits if you exceed the previously mentioned annual income limits but you will avoid both reductions. So if you want to double dip, it’s far more advantageous to wait until you obtain full retirement age.

Here’s a well-kept secret. Every year you wait to take your benefits after you reach full retirement age, you receive an 8% increase to age 70. If your full retirement age is 67, you can grab a 24% increase to your monthly benefit! Tell me where you can get 8% guaranteed annually with no risk? Absolutely no where!

Ok. Here’s the deal. Everyone’s situation is different. And like I always say, “If you know the rules, you can win the game”. We’ve hit most of the rules so now let’s add a little common sense. Take a look at your family. Is your mom and dad still living? If not, at what age did they pass? Do you have siblings? Are they still living? If not, at what age did they pass? Recently, I had a client who was 58. Her mom and dad both died in their 50s and 2 of her 4 siblings had already passed away. I told her, “You need to apply for Social Security benefits right now!” Clearly the earliest she can apply is age 62 but this is a great example where I can support taking benefits early. On the other hand, if your mom and dad are still living in their 80s and you haven’t lost any siblings, I would encourage you to consider pushing out to age 70 and grabbing that extra money cause you’re going to need it.

In summary, don’t be led by greed or fear. As you can see, the penalties are stiff. Rather, use the rules to your advantage and you may just come out ahead. One final note, if you pass before receiving all the money you’ve paid into Social Security through the years is it really that horrible? Think of it as paying it forward so someone less fortunate than you can receive a benefit later.