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.
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.
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.
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.
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.