Social Security -- When Should I
Start Drawing Benefits?

Figuring out when to start drawing your social security benefits is one of the more complex issues that you'll face, and there's a lot of conflicting information out there. I'll boil it down to the three issues that are primary drivers for the decision so that you'll understand the pros and cons. Note that there are two different things people need to understand about SS benefits: repayment and taxability. They are different and separate.

Health: This is the most important driver of all. If your health is relatively poor and/or your family life expectancy isn't long, you should go ahead and file for SS. (Unless you're working and under your normal retirement age, earning more than the allowed amount.) If your health is good, and your longevity genes are good, the other issues will be more important.

Working: This is the biggest mistake that I see folks make -- 'retiring' and not yet retiring! Most people need to earn an income in addition to SS benefits and investment and/or other retirement income. So they keep working, just not as much. Before your normal retirement age, the allowed limits of earnings are fairly small. If you do much more than greet at WalMart parttime, you're likely to exceed the limits. What happens then is that you GIVE BACK the very benefits that you filed for! And if there are any benefits left after that, you'll likely pay tax on them to boot. So if you're still working, never ever file for SS until your normal retirement age. At that point, you do not have to give back benefits, though you may still face tax on them. Which leads me to this: if your income will be high enough that the SS benefits are taxed at a fairly high rate, it makes sense to delay taking benefits due to the tax loss.

Age: The obvious one. Most of you know that the earlier you file for benefits, the smaller they are. It's a monthly computation that SSA uses to determine your benefit. What many people do not realize is that every month that they wait beyond their normal retirement age the benefit increases as well. So there really is no magic age for SS, and never has been. There is the 'normal retirement age' which based on your year of birth (see the site for that) where the benefits are 100%. Prior to that, they can range from around 70-80%, and after that, to as much as 120%. And this is where the disagreements come with various analysts. There are many who claim that you'll rarely outlive the money that you didn't draw earlier, by waiting. The math just doesn't work. Let's take an example. Suppose that at age 64, your benefit would be 1200. At 66, it would be 1400. And at age 68, it would be 1600. If you wait until age 68 to file, you're now up 400/ month over what you would have had at age 64. BUT. By waiting 4 years, you've given up 48 months of $1200, or $57,600! It'll take 12 years to recover that money. And financial advisors would tell you that even if you didn't need the money, and subject to the working paragraph above, you could take that added money and invest it and beat the added benefits of waiting until age 68 anyway. So even with good genes and health, it probably pays off to draw ealier rather than later.

Summary: If you're continuing to work, under normal retirement age, and earning more than the permitted amounts, DO NOT FILE! (Do file for Medicare, of course. You have a limited time to do that, but it has NO effect on drawing SS benefits. They are separate issues.) If you're done working, or over the normal retirement age, then it makes sense to file as early as you can. If you're in a high bracket and can see that lower brackets are coming, delay drawing benefits as long as you can since the tax cost will be high.

Finally, I've discovered that some of the best tax planning comes in retirement. By balancing the amounts of where you draw various funds from, whether retirement funds or non-retirement investments, we can often work to keep the SS benefits from being taxed at all, or in the low brackets, saving thousands of tax dollars. Whatever you do, try not to decide until we've had an opportunity to review all this. Overcoming years of "When I am x age, I'm filing!" is the most difficult hurdle of all.

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