This article has been updated for the tax year 2019
Deciding when to retire can have financial consequences for you and your family for many years. Delaying retirement age and taking Social Security Benefits later not only increases your monthly benefit but may also allow you the opportunity to employ powerful benefits management strategies.
Some Basics About Social Security and Retirement Age
Full retirement age (FRA) is 66 for people born between 1943 and 1954, and increases to 67 for those born in 1960 or later. Someone born between 1943 and 1954 that elects a retirement age of 62 instead of 70, will have their benefit reduced by 25%. For those born in 1943 or later, delaying retirement age beyond FRA can increase your expected benefit by 8% for each year up to a maximum of 32%. Benefits are reduced by $1 for every $2 of earned income above $17,040 (2018) and in the year of FRA, benefits are reduced by by $1 for every $3 of earned income above $45,360 (2018). Once you reach FRA there is no limit on earnings, in other words if your FRA is 67, you can earn as much as you want and your monthly benefit will not be affected.
You have several options as far as receiving social security benefits: early (age 62), full, and between full retirement age and age 70. To determine which option is best for you visit the Social Security Administration's (SSA) website at www.ssa.gov and use their retirement estimator. To give you an idea of the impact of retiring at different ages take a look at the scenarios below.
Full Retirement Age of 67
Scenario 1: Retirement Age 62
In the first scenario, we have a person earning $75,000 with a full retirement age of 67 taking Social Security Benefits at age 62 instead of full retirement age. You would receive approximately $18,110 in benefits each year until the end of your life. That is 70% of the full retirement benefit. Total benefits paid equal $362,208 assuming life expectancy of 82 years. Put off retiring until you are 63 and your monthly benefit increases to 75% of your full retirement benefit.
$1509 Monthly Benefit $362,208 Lifetime Benefit
Scenario 2: Retirement Age 67
In the second scenario, we have a person earning $75,000 and taking Social Security Benefits at age 67 or full retirement age. You would receive $25,872 in benefits each year until the end of your life. By waiting until your FRA you increase your monthly benefit by 30%. Total benefits paid equal $388,080 assuming life expectancy of 82 years.
$2156 Monthly Benefit $388,080 Lifetime Benefit
Scenario 3: Retirement Age 70
In the last scenario, we have a person earning $75,000 and taking Social Security Benefits at age 70 instead of full retirement age. By delaying benefits until after your FRA, the SSA will increase your benefit between 4% and 8% each year until age 70. You would receive $32,952 in benefits each year until the end of your life. By waiting until age 70, you increase your monthly benefit by 45%. Total benefits paid equal $395,424 assuming life expectancy of 82 years.
$2746 Monthly Benefit $395,424 Lifetime Benefit
When you factor in cost-of-living increases it complicates the issue. Over the past 10 years, SSA cost of living adjustments (COLA) have averaged 2.78% which includes no COLA in 2009 and 2010. The COLA for 2019 is 2.8%. By taking reduced benefits at age 62 your COLA will be reduced for the rest of your life as well. Your decision to take early benefits can also reduce your spouse's survivor benefit for the remainder of their lives.
By claiming social security benefits before FRA you also forfeit the opportunity to exercise alternative strategies involving benefit management. One option known as “claim and suspend” allows you to claim Social Security at FRA but suspend payments until a later date. Your spouse can draw benefits immediately while you continue to work and the value of your benefits continue to rise. This strategy is can be useful when your projected benefits are higher than your spouse's and you are ready to retire but your spouse isn't. Another option is called “claim now, claim later” which allow you to claim a spousal benefit now and switch to your own projected benefit later. This option may be of interest to couples that are ready to retire together. Instead of claiming their own benefits, the person with the lower benefit collects Social Security and the other spouse claims spousal benefits and lets his/her higher benefit continue to grow. As stated earlier, these strategies are only available once you have reached FRA.