Social Security: How to decide if it’s time to start claiming benefits

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On the one hand, Social Security seems like a pretty rigid and simple program: You pay your Social Security taxes during your working years, and then you get benefits after you retire.

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But you actually have a choice of when you want to claim your benefits (between the ages of 62 and 70) and that can have a big impact on your financial security for life.

Combined with the fact that everyone’s financial situation is different, you may want to consider speaking with a tax and/or financial advisor before making this big decision. But to point you in the right direction, here are some of the most important things to consider when determining if it’s time to start claiming benefits.

Your Health

No one knows for sure how long they will live, but there are some obvious factors that can help you make the best estimate. One of the most important is the state of your own personal health. Things like chronic illnesses or general poor health tend to shorten your life; therefore, if you fall into any of these categories, you should factor that into your Social Security strategy.

Genetics also play a role. If your family tree is full of ancestors who didn’t make it to the average American lifespan, chances are you didn’t either, all other things being equal. In either of these scenarios, getting your Social Security benefits as soon as possible is probably a good strategy.

Your other sources of income

The other most important factor in determining when you should claim benefits is your overall income situation. In other words, don’t apply for Social Security early just to have extra money. This is because every year you wait to claim your Social Security, your benefit will increase, at least until age 70.

If you have significant outside income from a 401(k), a pension, or perhaps even a side job, you might be better off in the long run if you can delay your benefits as long as possible.

Of course, the opposite is also true. If you have limited income outside of Social Security, you may need to apply for your benefits as soon as possible. Although your benefits would increase each year you wait, your immediate income need may outweigh the potential long-term benefits of waiting to apply.

The current interest rate environment

You may think that the current interest rate environment has little to do with your Social Security claim strategy, but you’d be wrong. If you want to optimize your lifetime earnings, this is a key consideration, especially if you have other sources of income.

Imagine a scenario where you are eager to receive your Social Security benefits and claim them at age 62. At the same time, the interest rate you can earn on conservative investments like US Treasury bills is 3%. In this scenario, assuming you can get by without relying solely on Social Security, you’re digging yourself a bit of a hole in terms of your long-term finances.

This is because every year you delay filing your benefits, your benefits automatically increase. In fact, if your full retirement age is 67, which is if you were born in 1960 or later, you’ll pass up gains of a whopping 8% per year from age 67 to 70. If you can risk a free increase in profits of 8% per year when you could only safely earn 3% in the general market, you are passing up some “free” money.

Your spouse’s social security status

If you’re married, you can’t think about your own Social Security benefits in a vacuum. When you and your spouse file will have a big impact on your overall lifetime payments.

Spouses earn the greater of their own Social Security benefits or up to 50% of their spouse’s. However, to reach that 50% level, a spouse has to wait to file until full retirement age, which is now 67 for most Americans. If you file at age 62, say, you could earn only 32.5% of your spouse’s benefit.

Things get worse if your spouse also claims Social Security before full retirement age. In that case, your spouse’s lifetime benefit is permanently reduced, meaning his or her spousal benefit would also be less than the potential maximum.

The bottom line

As long as you qualify for Social Security benefits, they’ll be waiting for you once you retire. However, there are numerous choices you can make about when and how you apply for benefits that may increase or decrease the amount you receive. For this reason, it’s always good to talk to a financial professional about all of your options.

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