This is a question that I am frequently asked by clients. Should they start as soon as they turn 62, when they are the full retirement age (now 66 for most individuals) or should they defer until they turn age 70? The answer is “it depends” on a number of factors. This article will walk you through the basic considerations.
For the purpose of this article, I will use the current maximum retirement benefit. According to the Social Security website:
“The maximum benefit depends on the age you retire. For example, if you retire at your full retirement age in 2013, your maximum benefit would be $2,533. But if you retire at age 62 in 2013, your maximum benefit would be $1,923. If you retire at age 70 in 2013, your maximum benefit would be $3,350.”
http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/5/~/maximum-retirement-benefit
Who is eligible for Social Security Retirement benefits? In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (10 years of work). If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later on, you can add more credits so that you qualify. We cannot pay any retirement benefits until you have the required number of credits.
In 2013, you earn one credit for each $1,160 in earnings up to a maximum of four credits per year. (The amount of money needed to earn one credit usually goes up every year.)
Your benefit payment is based on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years when you did not work or had low earnings, your benefit amount may be lower than if you had worked steadily.
Your benefit payment also is affected by the age at which you decide to retire. If you retire at age 62 (the earliest possible retirement age for Social Security) your benefit will be lower than if you wait until later to retire.
If you were born in 1944 or earlier, you are already eligible for your full Social Security benefit. If you were born from 1943 to 1960, the age at which full retirement benefits are payable increases gradually to age 67.”
Those born between 1943 and 1954 reach full retirement at age 66. If you were born between 1954 and 1960, you can look at the table published by the Social Security Administration.
How is my Retirement benefit calculated? The Social Security Administration’s publication titled A “Snapshot”, says:
“Generally, your Social Security benefit is a percentage of your average lifetime earnings. Low-income workers receive a higher percentage of their average lifetime earnings than those in the upper income brackets. A worker with average earnings can expect a retirement benefit that replaces about 40 percent of his or her average lifetime earnings.
Social Security never was intended to be your only source of income when you retire or become disabled or your family’s only income if you die. It is intended to supplement your savings, investments, pensions and insurance plans.”
Starting Social Security at age 62. Sixty-two is the earliest age that you can begin receiving the social security retirement benefit.
In the Social Security Administrations publication on Retirement Benefits, they tell us:
“Early retirement
You can get Social Security retirement benefits as early as age 62. However, you will receive a reduced benefit if you retire before your full retirement age. For example, if you retire at age 62, your benefit would be about 25 percent lower than what it would be if you waited until you reach full retirement age.
You may start receiving benefits as early as age 62. However, if you start your benefits early, your benefits are reduced. Your benefit is reduced about one-half of 1 percent for each month you start your Social Security before your full retirement age.”
Two fundamental questions come to mind when a client asks about beginning to draw their social security retirement prior to the required age for them to get the full benefit:
1. How long do you expect to live?
2. Are you planning to work prior to reaching your full retirement age?
How long do you expect to live? If for some unfortunate reason a person has a medical diagnosis that would lead them to conclude that they would not live to their full retirement age or may not live many years beyond their full retirement age, then it may be the best decision for them to begin drawing their Social Security even though they will have a reduction.
For illustration using the maximum payments above, let’s assume John wants to begin drawing his retirement at age 62 and does not expect to have any earned income prior to age 66 but believes that he may not live past age 70. For simplicity sake, the illustrations below will not consider any increases of Social Security.
1. Option #1: Begin drawing the $1,923 as soon as he turns 62. If you assume he will draw this amount for 8 years (96 months), he will receive $184,608 from Social Security.
2. Option #2: Begin drawing the $2,533 as soon as he turns 66. If you assume he will draw this amount for four years (48 months), he will receive $121,584 from Social Security.
3. Based on these assumptions alone (which includes the assumption that he will not have any surviving spouse or other qualifying dependent who will be entitled to continue his payment after his death), it would be clear that he would receive more total retirement benefits because he started at age 62.
4. Basically in this analysis we would be considering how much will the person draw prior to the full retirement age. In John’s case that is four years (48 months) for a total of $92,304. Then divide that amount by the expected difference between the reduced amount and the full retirement amount which in John’s case is $610 per month. The result would be that John would basically need to live beyond age 78 to have benefited from waiting to age 66.
Do you expect to have earned income between age 62 and 66? In the Social Security Administration’s publication on Understanding The Benefits, they tell us:
“If you work and get benefits, you can continue to work and still receive retirement benefits. Your earnings in (or after) the month you reach full retirement age will not reduce your Social Security benefits. In fact, working beyond full retirement age can increase your benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.
If you work but start receiving benefits before full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In 2013, the limit is $15,120.
In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($40,080 in 2013) until the month you reach full retirement age.
Once you reach full retirement age, you can keep working, and your Social Security benefit will not be reduced, no matter how much you earn.”
So the second factor is much harder to clearly define in a formula. Basically for John’s illustration, if he were to have earned income in the first year of $61,272 ($15,120 + ($23,076 x 2)), he would effectively have his entire Social Security benefit nullified and would have to pay back the full amount he received in his first year. He could earn $15,120 and have no reduction in his retirement benefit. Then for each dollar earned above $15,120 he loses $1 of retirement for every $2 he earns, so when he has earned $46,152 ($23,076 x 2) he will have to pay back his full benefit.
As indicated above, in the year that John will turn his full retirement age of 66, he will have a higher threshold of earnings before losing his benefit.
Even though, there is a limitation to how much a person will be able to earn it is a facts and circumstances question that will require some thought and calculations to give the client a good answer. Obviously, if the person has been earning over the Social Security wage maximum ($113,700 in 2013), then the decision is really easy but for many middle to lower income clients it is not so clear.
Should I wait to age 70 to begin drawing Social Security? In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“You may choose to keep working even beyond your full retirement age. If you do, you can increase your future Social Security benefits in two ways.
Each additional year you work adds another year of earnings to your Social Security record. Higher lifetime earnings may mean higher benefits when you retire.
Also, your benefit will increase automatically by a certain percentage from the time you reach your full retirement age until you start receiving your benefits or until you reach age 70. The percentage varies depending on your year of birth. For example, if you were born in 1943 or later, we will add 8 percent per year to your benefit for each year that you delay signing up for Social Security beyond your full retirement age.”
Once again, the biggest question is probably, how long do you expect to live?
Again, let’s do the math with John using the assumption that he will not have any surviving spouse or other qualifying dependent who will be entitled to continue his payment after his death. The Life and Worklife Expectancies by Hugh Richards, MS and Jon Abele, Esq. published by Lawyers & Judges Publishing Company, Inc., 1999 indicates the life expectancy for a man turning 66 is 15.4 years (age 81.4). So let’s assume that John dies on his 82nd birthday.
Similar to the approach above, we basically would be considering how much will the person draw prior to turning age 70. That is again four years (48 months) for a total of $121,584 ($2,533 x 48 months). Then divide that amount by the expected difference between the reduced amount and the full retirement amount which in John’s case is $817 ($3,350 - $2,533) per month. The result would be that John would basically need to live beyond age 81 (about 12.4 years) to have benefited from waiting to age 70.
Deciding when to retire. In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“Choosing when to retire is an important but personal decision. Regardless of the age you choose to retire, it is a good idea to contact Social Security in advance to learn the available options and make an informed decision. In some cases, your choice of a retirement month could mean higher benefit payments for you and your family.
You should apply for benefits about three months before the date you want your benefits to start.”
This article is not intended to discuss the benefits for spouses but it should be noted in the Social Security Administration’s publication on Retirement Benefits, they tell us:
“A spouse who has not worked or who has low earnings can be entitled to as much as one-half of the retired worker’s full benefit. If you are eligible for both your own retirement benefits and for benefits as a spouse, we always pay your own benefits first. If your benefits as a spouse are higher than your retirement benefits, you will get a combination of benefits equaling the higher spouse benefit.
If you have reached your full retirement age, and are eligible for a spouse’s or ex-spouse’s benefit and your own retirement benefit, you may choose to receive only spouse’s benefits and continue accruing delayed retirement credits on your own Social Security record. You then may file for benefits later and receive a higher monthly benefit based on the effect of delayed retirement credits.”
As previously indicated this article has dealt primarily with the decision of whether to start drawing the retirement benefit at age 62, 66 or 70 taking into consideration just the individual without regard to the dynamics created when there is another person whose payment will be influenced by this decision. When you take on the engagement to discuss this decision with a client you need to have a clear understanding of how Social Security works and who, if anyone else, will be impacted by the decision.
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
Comments powered by CComment