As retirement approaches, one of the critical financial decisions individuals face is selecting the optimal time to claim Social Security benefits. This choice has a lasting effect on the monthly income received from these benefits, making it essential to assess personal circumstances thoroughly before proceeding. While there is no universal ideal age to start collecting Social Security, certain indicators may signal that the time to begin has arrived.
How Claiming Age Influences Benefit Amounts
Your full retirement age (FRA) determines when you qualify for your standard monthly Social Security benefit, also known as your primary insurance amount (PIA). It is possible to claim benefits either before or after this age, but doing so adjusts the monthly payments accordingly.
If benefits are claimed prior to the full retirement age, the Social Security Administration reduces the monthly amount. The reduction equals 5/9 of 1% for each of the first 36 months before FRA, and then 5/12 of 1% for each additional month beyond those first 36. For example, if your full retirement age is 67, your benefits would be decreased by specific percentages depending on the age at which you claim, as follows:
- Age 66: 6.6% reduction
- Age 65: 13.33% reduction
- Age 64: 20% reduction
- Age 63: 25% reduction
- Age 62: 30% reduction
Conversely, delaying benefits beyond your full retirement age results in incremental monthly increases. Benefits rise by two-thirds of 1% for each month delayed, roughly an 8% increase annually, until age 70. After reaching age 70, no further increases apply for deferral.
Recognizing the Break-Even Age
The break-even age is a key concept that helps individuals evaluate the total lifetime value of claiming at different ages. It marks the age at which the cumulative benefits received from starting Social Security earlier equate to the cumulative benefits from delaying the claim.
For instance, when comparing claiming at age 62 versus at age 70, the break-even age is approximately 80.4 years. If you live before this age, total benefits received will be higher if you started claiming at 62. If you live beyond this point, waiting until 70 results in higher total lifetime benefits. Understanding your personal life expectancy and health status, along with this break-even age, can guide whether to opt for smaller monthly payments over a longer period or higher payments over a shorter duration.
Addressing Income Shortfalls
Many retirees ideally have diversified income sources, such as 401(k) plans or individual retirement accounts (IRAs), to cover expenses during retirement. However, this is not the case for everyone, and a significant portion rely heavily on Social Security to fill the gap between expenses and other income.
If planning your budget reveals an insufficient income level to cover basic needs, it can be prudent to begin claiming Social Security benefits to maintain financial stability. Data indicates that about 53% of retirees count on Social Security as their primary income during retirement.
Considering Spousal Benefits
Social Security includes provisions for spousal benefits based on one spouse's work record. This can benefit couples where one partner's earnings history is low or irregular. To qualify for spousal benefits, the primary spouse must already be receiving their own Social Security payments.
If your spouse wishes to claim spousal benefits, their eligibility hinges on you having claimed your benefits. Spousal benefits can amount to up to 50% of your primary insurance amount if claimed at the spouse's full retirement age. However, claiming spousal benefits before that age results in reduced payments.
Understanding the Retirement Earnings Test
Claiming Social Security benefits before reaching full retirement age while continuing to earn income triggers the retirement earnings test (RET). This test may reduce benefit payments based on earnings exceeding specific limits.
For individuals not attaining full retirement age in 2026, the earnings limit is set at $24,480. Exceeding this amount reduces benefits by $1 for every $2 earned above the threshold. For those reaching full retirement age in 2026, the limit rises to $65,160, with benefits reduced by $1 for every $3 earned beyond this figure.
Importantly, benefits withheld due to the RET are not permanently lost. Once the retiree reaches full retirement age, the Social Security Administration recalculates benefits and restitutes the previously withheld amounts over time.
Conclusion
Choosing when to claim Social Security is a multifaceted decision requiring an evaluation of personal financial circumstances, life expectancy, spousal considerations, and potential earnings. Awareness of how claiming age modifies benefit amounts, the break-even age between different claiming points, and the implications of continuing work income before full retirement age are essential factors for retirees contemplating this significant milestone.