Knowing when to start taking social security can change your entire financial outlook. There are many factors that go into what you receive in your social security checks each month, but the number one thing that changes the value is when you decide to begin taking those withdrawals.
What is Social Security
Social security was created by the Federal Government in 1935 in order to provide a safety net for disadvantaged Americans during the Great Depression. It has turned into a large part of the retirement portfolio of many people across the country.
When I think about social security, I think of it as an employee and employer sponsored pension plan. You put into this plan each year you work, and once you reach retirement age, you get to make withdrawals from the plan. The more money you put in over your working years, the more you are able to take out.
Each pay period, an employee contributes 6.2% of their salary to social security which is matched by their employer. This is done up to $137,700 in salary (2020 rate – See IRS Website for up to date info).
How Much Do You Get?
Social Security benefits are determined based on your 35 highest earnings years and adjusted for inflation. Working for more than 35 years will get your lowest earnings years dropped from the calculation but working less than 35 years will lower your benefits. You can estimate your benefits using the social security calculator provide by the Social Security Administration.
Social security benefits can begin being received at age 62 but will be reduced based on your full retirement age. See the chart below:
You can see above, there are severe reductions in you social security benefits when you decide to take withdrawals beginning at age 62 instead of waiting until your full retirement age. This penalty will be decreased each month until you reach full retirement age.
The above chart shows what percentage of social security benefits you can expect to receive based of when you start taking them, assuming you were born after 1960. The longer you wait, the more you will receive!
When to Start Taking Social Security – The Numbers
Per U.S. News, the average monthly social security benefit was $1,503 in January 2020. Let’s use that number in our next example and assume the $1,503 is what would be received at full retirement age of someone born after 1960, so age 67. What would the difference be between taking the benefit at age 62, age 67, and age 70.
This chart runs through age 90 and shows just how much you can expect to receive throughout those years. While taking benefits at age 62 gets your benefits flowing quicker, you will get significantly less total benefits the longer you live. Postpone until your full retirement age of 67 and at age 80 you will have received more in benefits than starting at 62. Wait until the age of 70 and you will have received more at age 81. At age 83, you will have received more in benefits by waiting until age 70 than starting at 67.
No matter the monthly benefit you receive, the numbers will play out the same way. The max benefit of someone taking their benefit at full retirement age, or age 67, is $3,011. If they postponed their benefit until age 70, they will receive more money by age 83 than if they began benefits at age 67.
When To Start Taking Social Security – The Decision
Now that you have the basic numbers, you can make an informed decision. You sacrifice real money by taking the benefits as soon as you can, but you will at least have the cash flow coming in. Understanding your financial health will make a huge difference in determining when to begin taking your benefits.
If you have the financial well-being to not have to worry about money if you don’t take the benefits right away, it may make sense to wait until later to start the benefits. If you are struggling financially and need the money as soon as possible, go ahead and get those benefits.
Your health also needs to be taken into account when determining when to start taking social security benefits. If you do not believe you will live to the age of 70, don’t wait to start taking the benefits. Start taking them as soon as possible.
Myth of Social Security – Bankruptcy
I wanted to end this article discussing the biggest myth you will hear about Social Security. That when you are able to retire, Social Security will be insolvent and you won’t get a penny.
Is there a problem with the current structure? Yes. But it won’t lead to the total insolvency of Social Security and lead to no benefits being paid out. As long as there are employers and employees paying into the system, there will be money paid out.
Based on current estimates, if there was no more money left for benefits, the amount coming in would be enough to pay 76% of the benefits owed. While this is obviously not the full amount, it does not mean the plan would be insolvent. People would just get less than they expected.
This could change at any moment by legislation from the Federal Government. They could change the way to program operates or dismantle the program all together. I highly doubt the program is ever removed but you never know!
The Takeaways
When to start taking social security benefits is not a decision to be taken lightly. You need to weigh a variety of factors to come up with the best decision for yourself. With the charts above, you have the knowledge of the numbers behind the decision.
When the time comes, you need to look within yourself and have an honest conversation about the other variables. What is your health like? Do I need the money now or can it wait? Those are the questions you need to ask yourself in order to come to the conclusion that is right for you.
It is not an easy decision, but trust your judgment and you will make the right choice for you and your family.