Claiming Social Security
Social Security started as a federal program during The Great Depression to provide an income base to retirees, to be used in conjunction with savings and pensions. The program has morphed overtime with the addition of disability benefits, spousal benefits, and survivor benefits. Combined with the decline in the number of funded pensions, retirees have come to rely heavily on Social Security as a guaranteed source of retirement income. Your Social Security benefit is calculated using your 35 highest years of earnings, adjusted for inflation, and your benefit amount is stated at your Full Retirement Age (“FRA”). FRA was 65 for everyone until an amendment in 1983 and is now on a sliding scale, based on the year in which you were born. Below is a shortened chart, starting with those who’s FRA is 66:
|Year of Birth||FRA|
|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 or later||67|
You can start to collect your benefits before your FRA, as early as 62, at a reduced benefit amount and if you delay collecting past your FRA, as late as 70, you are rewarded with an increased benefit. This reduction or increase from your benefits at full retirement age is calculated per month you file early or late so each month you can wait, you will have a higher benefit than the month before. Once you file for Social Security benefits to begin, your monthly amount is locked in place for life (with the exception of a Cost of Living Adjustment or “COLA”). See the chart below for how early or delayed claiming can impact your monthly benefit amount. This chart assumes the full retirement age is 67.
|Age||% of Benefit|
So, when should you file? For some, it is a no brainer to claim early and for others, delayed claiming makes more sense. There are a variety of factors that affect claiming Social Security benefits and each person’s situation is unique to them. Although, a full analysis is beyond the scope of this blog post, below are a few considerations that may apply:
Health plays a large role in deciding when to file. For people with poor health, delaying claiming in order to receive a higher monthly benefit may not make up for the months of reduced benefit that were forfeited so they may choose to claim early and start receiving their benefits as soon as they are eligible.
Some retirees lack sufficient other assets to bridge the gap between their retirement and FRA and need to collect early so their cashflow is not interrupted. Those with assets sufficient to fund the retirement gap must determine whether they will be further ahead by liquidating their assets or collecting benefits.
Coordination of spousal benefits for married couples is a central focus for many, especially if each spouse qualifies for their own benefit and one spouse qualifies for a significantly higher amount. It might make sense for the spouse who qualifies for the higher benefit to delay claiming until age 70 so they can have one spouse receiving the highest possible amount. This can make a significant impact when one of the spouses passes away.
An often-overlooked factor in making the decision of when to claim is the retiree’s risk tolerance. People that are averse to risk typically claim earlier as the current benefit is tangible. It is not uncommon to hear concerns voiced regarding the Social Security program, as a whole; some believe the program will not exist in the future and some believe that changes will occur that would have a permanent, negative impact on their unclaimed benefits.
These are just a sample of common considerations in deciding when to file for Social Security benefits, however, each person, couple, and situation are unique. Please consider including your financial advisor in the decision-making process when it comes to claiming your Social Security benefit. Be on the lookout for a follow-up blog post with a deeper dive into Social Security benefits.
Danielle Parmenter, CFP®
Associate Wealth Planner