Nearing retirement? Think twice about Social Security timing

When it comes to retirement, timing is everything. That includes determining when to start collecting Social Security benefits.

Essentially, you have three choices: You can start receiving benefits as early as age 62. You can wait until you reach full retirement age, somewhere from age 65 to 67. Or you can delay as long as age 70.

Keep in mind that the earlier you start receiving benefits, the less you’ll receive each month. That’s because your benefits are reduced a fraction of a percent for each month before your full retirement age. Conversely, the longer you wait, the greater your monthly benefit will be.

“The vast majority of people file for Social Security benefits at age 62 with no more consideration than the fact that they can,” says Tom Murphy, certified financial planner at Murphy & Sylvest in Dallas. “It is years before they realize waiting would have been much better for all.”

Your full retirement age — the age at which you may receive unreduced Social Security benefits — depends on the year of your birth. For example, if you were born in 1940, you can receive full benefits at age 65.5. If you were born in 1960 or later, you’ll have to wait until you’re 67.

You can find your full retirement age at the Social Security Administration’s website. You can also see how much your benefit will be reduced if you retire between age 62 and full retirement age.

“Claiming Social Security at an earlier age permanently decreases benefits, often significantly,” Murphy says. “This is particularly true when one spouse earned the majority of the income. Waiting results in a much larger survivor benefit for the spouse who earned less.”

If possible, wait as long as you can before claiming Social Security. Benefits increase by a certain percentage, depending on when you were born, if you delay your retirement even beyond your full retirement age. For every year you delay past that, up to age 70, your benefits will rise by 6 percent to 8 percent.

“It does not increase after age 70, so there is no point in deferring past then,” says Murphy.

Certified financial planner Jan Valecka, of Valecka Wealth Management in Dallas, advises: “If you are under full retirement age and are still working with substantial earnings, it is usually not advantageous to begin benefits.”
Of course, some people have to take Social Security early because they need the money.

“The median 401(k) account for somebody who’s 60 and older is only $56,000,” says Christopher Jones, chief investment officer at Financial Engines, which provides retirement advice to employees in 401(k) plans.

“There’s a significant fraction of the population that really doesn’t have that much in the way of accumulated savings, so Social Security is going to form the backbone, if not the vast majority, of their retirement income,” Jones says.

To help consumers decide the best time to claim Social Security, Financial Engines recently launched a free planner on its website.

“When to start taking your Social Security retirement benefits is a tricky question that has no hard-and-fast answer,” says Valecka. “Taking the benefit early or waiting until full retirement age depends on how long you are going to live, and no one has that answer.”

This much is certain: It has to be a calculated decision. Things to consider, besides your health and your family’s longevity:

• Your current cash needs
• Whether you plan to work in retirement
• Other sources of retirement income
• Your future financial needs and obligations
• The amount of your future Social Security benefit.

“Getting this decision right and getting the most value from your Social Security benefits will be critical to having a good standard of living in retirement,” Jones says.