If you’re getting ready for retirement, one of the most important questions you’ll want answering is: when should I take Social Security?
This is the most frequently asked question by all of our pre-retiree clients. There’s lots of information out there that dives into when the right time to take Social Security is, and, usually, people already have an idea of when might suit them. However, what this information fails to take into account is your own personal situation.
In this post, we illustrate the long-term impact taking Social Security at different times can have on your assets. So, if you’re considering taking it early, at full retirement age (FRA), or waiting until you’re 70, it’s important to know the long-term effects it can have.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
When can you take Social Security?
The earliest age you can take Social Security from is 62. The latest is age 70. That’s an eight-year window where you can choose to start taking Social Security.
Each year that you wait, the amount of Social Security you’ll get increases. So, if you take it earlier, you’ll receive less, but if you wait until the upper age limit, you’ll get the maximum amount possible. This is why a lot of the information says you should wait and take your Social Security as late as you can. However, we don’t believe this is the best option for everyone.
Many people choose to take Social Security at full retirement age. The IRS and Social Security define when this is, and currently, it’s contingent on the year you were born, making you either 66 or 67 at full retirement age.
Now, if you reach full retirement age and decide not to take Social Security right away, that’s going to draw on your assets. Those who retire at 66, and wait to take Social Security when they’ll get the most bang for their buck, have to face 4 years of withdrawals on their assets first. In this case, you have to live for a long time to truly reap the benefits!
Our approach to taking Social Security is to evaluate what works best for your individual retirement plan. Perhaps waiting until you’re 70 doesn’t make sense for you. In which case, taking it earlier could preserve your assets in the long run.
On the other hand, if you take Social Security after age 62 but before full retirement age, you need to be aware of some limitations.
Social Security penalties
If you’re still working between age 62 and full retirement age and choose to take Social Security, there’s a limit to the amount you can earn, otherwise, you will face a penalty.
In 2021, the maximum that a person age 62 can make and still take Social Security penalty-free is $18,960 a year. If you earn less than this, your Social Security will not be penalized. But what if you earn more?
As an example, say you’re planning on consulting and making $35,000-$40,000 a year at age 62. The math quickly tells us it does not make sense for you to take Social Security yet. If your Social Security benefit is $10,000 a year and you earn $10,000 more than the $18,960 limit, you’ll be penalized 50% of your Social Security. That means you’ll lose $1 for every $2 you earn over that limit. Now, instead of receiving $10,000 a year in Social Security, you’ll only get $5,000.
So, if you’re earning above this limit, then it’s highly unlikely that taking Social Security makes financial sense for you. To avoid these penalties, be clear with your financial advisor about how much you’re expecting to make at age 62. If you want to work part-time, or in a low-paid position, it could still be possible to take Social Security penalty-free. But you need to be aware of the numbers.
But what if you’re not planning on working at age 62? If you’re hoping to retire at this age, is taking Social Security a good option for you?
When is the right time to take Social Security?
We’re going to use a fictional person to demonstrate the differences between taking Social Security at various ages. In three example scenarios, we have Mary. She is 60 and planning to retire at age 62. We’re going to use our system to work out when would be the best age for Mary to start taking Social Security.
Before we dive into this example, it’s important to note that Social Security typically rises every year with a cost-of-living adjustment. To keep this example as straightforward as possible, the Social Security amount will not include any increases.
At age 60, Mary has an IRA with $1.2 million in retirement savings, that’s making a rate of return of around 6%. With two more years of work ahead of her, and the interest rates’ growth, Mary can expect to have around $1.4 million at age 62. This is when she hopes to retire.
One thing that Mary needs to know going into retirement is how much money she’s spending each month. Let’s say her expenses are $5,000 a month, with an additional 3% inflation rate.
Scenario 1: Taking Social Security at full retirement age
So, what happens if Mary chooses not to start taking Social Security until full retirement age (67)? For the first five years of her retirement, she will need to draw $5,000 each month on her own assets to cover all of her expenses. When Mary reaches full retirement age, she will start receiving $3,500 of Social Security a month. This now reduces the draw on her assets down to $1,500 each month.
If we look forward to Mary’s assets at age 90, we have some significant changes. Due to inflation, her expenses have increased to $12,000 a month. But thanks to a good rate of return, Mary’s assets have grown to $1.6 million. This is a good outcome for Mary, she can comfortably maintain her lifestyle well into retirement and has more money leftover than she initially retired with.
Scenario 2: Taking Social Security at age 62
But what if Mary took her Social Security when she retires at age 62? We know that she would receive less in Social Security each month because she’s taking it early. So, in this scenario, Mary receives $2,450 instead of $3,500. This means that while she won’t receive as much Social Security each month, she won’t need to draw as much on her assets as she’ll have support throughout her retirement.
In this instance, at age 90, Mary has $1.75 million left over. That’s over $100,000 more than if she waits until full retirement age.
So, you can see that while it might be tempting to hold off taking Social Security early to get more each month, that might not be the best decision. In Mary’s case, it’s more beneficial to take the lower payments long-term.
Scenario 3: Taking Social Security at age 70
Finally, let’s take a look at what happens if Mary waits until age 70 to take Social Security. Because she’s waited until the upper limit, Mary will now receive $4,340 a month. This may instantly look more appealing than taking it early at the lower rate of $2,450, or even in comparison to full retirement age at $3,500.
However, Mary will now have to draw on her assets from age 62 until she’s 70 to cover her expenses. This is a long and sizeable draw. If we look forward to age 90, Mary now has around $1.5 million left over in her nest egg.
So, even though she’s receiving more money on a monthly basis, that initial period of withdrawal has had a big knock-on effect. Looking solely at Mary’s assets at age 90, Mary’s best option will be to take Social Security at the earliest possible age, 62.
What does this mean for you?
This example isn’t reflective of everyone’s situation. If Mary wanted to continue working, had other sources of income, or there was a spouse involved, it may change the outcome. So do not take this example as individualized advice.
What we want you to take away from this article is, if you’re researching when to take Social Security, it’s likely that you’ll get a mass answer that won’t translate to your own situation.
If you want to find out more about when you should take Social Security and how your retirement decisions affect this, reach out to us. We offer a completely free, no-obligation 15-minute phone consultation, where we can run through your numbers and give you an idea of when is right for you to take Social Security. Book your call now.