There’s a strategy behind choosing your most optimal time to elect your Social Security benefits.
Most people are eligible to begin collecting Social Security at age 62 if they’ve paid into the system for at least 10 years. But that doesn’t necessarily mean you should. To help you decide the right time to start collecting Social Security, it’s important to understand how benefits are calculated and how the age at which you begin taking benefits will impact the amount you’re eligible to collect.
Social Security benefits are paid out based on the number of credits you’ve accumulated over your working life. You’re eligible to receive a maximum of four credits in any given year, and in 2021, you’ll receive one credit for every $1,470 you earn. Every year the amount you need to earn to receive a credit increases slightly as wages increase. People who earn at least 40 credits over their lifetime are eligible to collect Social Security benefits when they retire. (Note: These credits are for retirement benefits. The rules are different for disability benefits.)
Your benefits are calculated based on the average of your top 35 earning years. However, not all your earnings are used to determine your benefits. In 2021, the limit is $142,800. Anything you earn over that isn’t included in the calculation of your Social Security benefits.
Full retirement age—which varies from 65-67, depending on when you were born—is the age when you’re entitled to collect 100 percent of your Social Security benefits. You don’t have to wait until full retirement age to begin collecting benefits, and you don’t have to start collecting benefits as soon as you reach full retirement age. Most people are eligible to begin collecting benefits at any time from age 62-70. However, when you begin collecting your benefits impacts how much you receive.
If you start taking Social Security before your full retirement age, you’ll receive a permanently reduced benefit. The amount by which it’s reduced varies based on how long before your full retirement age you start collecting. If you take Social Security as early as age 62, your benefits will be reduced by as much as 25%-30%.
If you wait to collect benefits until after your full retirement age, you’ll earn a delayed retirement credit for every month you don’t take Social Security until you turn 70, which can increase your benefit by up to 8% a year. There’s no additional benefit for waiting longer than age 70 to receive your benefits.
While delaying the collection of benefits to increase the amount you earn may sound great, there are many things to consider when deciding the right time to start taking Social Security.
In general, it’s best to wait until full retirement age. But that may not be right for everyone. Here are some of the biggest factors to consider as you decide when the right time is to collect benefits.
Before you begin collecting Social Security, it’s a good idea to evaluate your overall financial situation and the role Social Security will play in funding your retirement. It’s also important to consider how your health may affect your decision as well as the financial implications your decision will have on others who may be dependent on your income. In order to decide the best withdrawal strategy for you and your family, there are many cost-effective ways like free Social Security calculators and online resources to get you a detailed picture of your income. If you have a financial planner or tax professional, you can also rely on them.