When you hit your 60s, it’s time for you and Social Security to come to a reckoning.
After all, it’s likely you have been paying into Social Security for decades, and now you have a choice to make: Claim your benefit early, claim it right on schedule, or postpone claiming it.
Unfortunately, no perfect answer exists to make this easy. What’s best for your neighbor may be different from what’s best for your cousin, which in turn may be different for what’s best for you.
You can claim Social Security as early as age 62, but there’s a catch. The amount of your monthly checks will be reduced, and that reduction is for life. To qualify for your full benefit, you need to postpone claiming until your full retirement age, which for most people is between 66 and 67.
But there also is a benefit to waiting until you are 70, because you are rewarded with an even larger monthly check if you do.
As you ponder this momentous decision, here are five key points to keep in mind:
Would you like to continue to work even after you start drawing Social Security? You can, but be aware: There’s a limit to how much you can earn if you haven’t reached full retirement age. If you earn more than what’s allowed for the year, your benefit is reduced by $1 for every $2 you go over the maximum. This rule begins to ease up in the year when you reach full retirement age. During that year, the benefit is reduced by $1 for every $3 you earn over an increased maximum. Those earnings limits are adjusted for inflation each year, so make sure you are up to date. Once you finally reach full retirement age, you can work and earn all you want. There’s no limit.
Your Social Security benefit could be taxed if you continue to work or have other sources of income. Your entire benefit is never taxed, though; instead, taxes owed are based on a percentage of your total benefits. If you file federal taxes as an individual and your provisional income is between $25,000 and $34,000, you may have to pay income taxes on 50% of your Social Security benefit. If your income is more than $34,000, up to 85% of your benefit could be taxable. Married couples filing jointly may be taxed on 50% of their benefit if their income is between $32,000 and $44,000. They may be taxed on up to 85% of their benefit if their income is more than $44,000.
People are living longer, and that could play a role in when you decide to claim your Social Security benefit. Consider how healthy you are and how long you think you might live. If you anticipate living into your 80s or 90s and you have other sources of income to hold you over, you might want to delay taking Social Security until you are 70 to get the maximum benefit. That larger monthly check could be especially important if, over time, your retirement savings start to run out.
A pension could affect your Social Security benefit, depending on whether it’s a government pension or a private pension. This is because some federal employees and employees of state and local governments receive pensions based on earnings that they didn’t pay Social Security taxes on. Let’s say that, although you didn’t pay Social Security taxes with your government job, you are eligible for Social Security benefits because of another job where you did pay the tax. In that case, your benefit amount may be reduced, and the Windfall Elimination Provision will help determine how much your benefit actually is.
Here’s an added twist: If you are eligible for Social Security based on your spouse’s record, and you also have a pension not covered by Social Security, the Government Pension Offset determines whether your benefit on your spouse’s record will be affected.
Impact on spouse
Marital status is another factor that can affect when you take Social Security. For example, married people are eligible for benefits based on their spouse’s work history. This spousal benefit is 50% of the working spouse’s earned benefit, but for you to claim this the working spouse must be at least 62 and already have filed for benefits. If you are divorced, you may be eligible for spousal benefits based on your ex-spouse’s work history. Naturally, there are rules related to that: Your marriage must have lasted at least 10 years, you must be divorced for at least two years, and you must still be single. Also, you need to be at least 62 and not eligible for higher benefits based on your own work record. But unlike spousal benefits for married people, your ex-spouse does not need to have filed for benefits for you to claim them.
These are just a few factors to think about as you decide when to take Social Security benefits. The decision is a significant one, and getting it wrong could prove costly. Consider talking to a financial professional to help you navigate the often-confusing rules before making any decisions regarding when to start benefits.
You earned that Social Security benefit. You want to make sure you use it to your best advantage.
Ronnie Blair contributed to this article.