A question frequently asked by individuals who are approaching the age at which they can draw Social Security benefits is, “At what age should I begin taking my benefits?” To make an informed decision, a number of issues should be considered, including how doing so affects your benefits, what the tax ramifications are, the historical longevity of your family, and your financial needs. But first, let’s review how the decision will impact your Social Security benefits based on when you decide to retire.
- Wait Until “Normal” Retirement Age—Individuals who retire at the normal retirement age receive the standard Social Security benefits based on their lifetime earnings. The “normal” retirement age is no longer 65 years of age. For individuals born after 1937, “normal” retirement age is now based on a sliding scale and varies according to the year of birth, as indicated in the table below.
Born “Normal” Retirement Age
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943 to 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 & Later 67
- Take the Benefits Early—You may begin taking benefits as early as age 62 if you are willing to receive a reduced amount over your lifetime. The amount of the reduction is based on how early the benefits are taken. Here is an example of how the reduction works. If your full retirement age is 67, then the approximate reduction for taking the benefits at an earlier age is as follows:
Retiree’s Spouse’s (1)
Age Approximate Reduction Approximate Reduction
62 30.0% 67.5%
63 25.0% 65.0%
64 20.0% 62.5%
65 13.3% 58.3%
66 6.7% 54.2%
67 Normal 50.0%
(1) Generally, a spouse whose Social Security benefit is based on the other spouse’s earnings receives 50% of what the other spouse receives. This column represents the spouse’s retirement benefit based on the retiree’s benefits.
- Take the Benefits Late—Some people decide to continue working full-time beyond retirement age. In that case, their Social Security benefits increase in the following two ways:
- Each additional year that a person works adds another year of earnings to his or her Social Security record. Higher lifetime earnings may result in higher benefits when one retires.
- In addition, a person’s benefit will be increased by a certain percentage (see table below) if he or she delays retirement. Such increases, called delayed retirement credits, will be added in automatically from the time at which the individual reaches full retirement age until he or she begins taking benefits or reaches 70 years of age 70.
Date of Birth Annual Increase Monthly Increase
1930 4.5% 3/8 of 1%
1931-1932 5.0% 5/12 of 1%
1933-1934 5.5% 11/24 of 1%
1935-1936 6.0% 1/2 of 1%
1937-1938 6.5% 13/24 of 1%
1939-1940 7.0% 7/12 of 1%
1941-1942 7.5% 5/8 of 1%
1943 or later 8.0% 2/3 of 1%
You may also wish to take your life expectancy into consideration. If your family history indicates a shorter than average life expectancy, you may wish to take the benefits earlier than later. On the other hand, if you begin drawing your Social Security benefits prior to reaching full retirement age, and you continue to earn wages or self-employment income—perhaps by continuing to work part-time—your benefits may be reduced if your earnings exceed an annual limit. For example, if you were born in 1950, your normal retirement age is 66, but you could begin receiving Social Security benefits at age 62 in 2012. If you were to do so, but you continued to work, your benefits would be reduced by $1 for each $2 above $14,640 of wages or net self-employment income.
Social Security is taxable once an individual’s income for the year, including one-half of the Social Security income and otherwise nontaxable interest income, exceeds $25,000 ($32,000 for married taxpayers filing jointly). Thus, the benefits are not taxable at all for very low-income taxpayers, and as the taxpayer’s income increases, a greater portion of the benefits become taxable. However, no more than 85% of the benefits are added to taxable income. Taxpayers who are still working or who earn substantial other income may thus not wish to utilize the “early” option, since doing so results in a reduced benefit that is subject to taxation and thereby further reduced.
Everyone’s situation is unique, and there are a number of different issues to consider. If you would like to set up an appointment in order to discuss your specific circumstances, please give this office a call.