Social Security Timing, Your Guide On When and What to Do

Despite recent warnings that the social security system will be unable to provide benefits in the future as a result of a drying up pool of funds, social security currently accounts for 50% of retirement income for more than half of Americans aged 65 and up, and 90% of income for a quarter of the same age group. In addition to 401(k)s, IRAs, and a number of other retirement savings account options, the social security system is an important part of the American retirement infrastructure. 

As with many other retirement income options, eligibility for receiving benefits is dependent on a number of stipulations including the age at which you retire, the number of years you’ve worked, as well as what your income was before entering retirement. We’ve put this guide together to help best prepare you for receiving social security benefits, more specifically when and how to do so successfully.

A Brief Overview of the Social Security System

Overseen by the Social Security Administration, the first Social Security Act was passed in 1935 by President Franklin D. Roosevelt, established to provide benefits to retired, disabled, and survivor Americans. The pool of funds in the social security system is primarily funded through payroll taxes which are entrusted to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. Both of these funds purchase government securities whose interest is in turn used to fund monthly benefit allocations to qualifying American citizens.

Understanding Current Critiques of the System

Different from other types of retirement plan options, the money that is taken through payroll taxes doesn’t go into an individual’s account with their name on it. Rather, the money is pooled together and paid to individuals that are in retirement at that present time. Thus, the continued success of the social security system depends on the continued funding of retirees by a proportionally larger number of individuals in the present workforce. As baby boomers reach the point of retirement, a record number of individuals are going into retirement while living longer lives afforded by improved medical and technological advancements. 

The main reasoning for the depletion of the funds within the social security system is due to the fact that the present workforce may one day not be able to work enough to fund the social security benefits of the growing number of individuals in retirement. That being said, the social security system has undergone a large number of changes in structure and composition since its inception, and the system will likely undergo additional changes before the prospect of running out of funds will even become a problem. While the current social security system is in place, it’s still important to understand how it works so you’ll understand when your benefits will start, how much they will be, and when you become eligible to receive them.

When Am I Eligible to Receive Social Security Benefits?

A majority 71% of social security beneficiaries are retired workers, while the remaining beneficiaries include ex-spouses and children of retirees, disabled workers and their families, and survivors of deceased beneficiaries. Since an overwhelming majority of those receiving benefits from the social security system are those in retirement, we will primarily focus on the process of receiving benefits for those looking to receive benefits after they have spent a qualifying number of years in the workforce.

Eligibility Requirements

When employees receive payment and pay taxes on those payments, they receive a form of “credit” for every $1,410 received in earnings. Employees are able to receive up to a maximum of 4 credits each year, with the amount of earnings needing to qualify for a credit increasing virtually every year. Most people will need to accumulate 40 work credits in total to become eligible to receive social security benefits. 

Full Retirement Age

Individuals are eligible to begin receiving social security benefits when they reach the age of 62, however, there are benefits to waiting until you reach your “full retirement age” before you begin taking allocations. Additionally, you may lose up to a quarter of your entire benefit if you begin receiving benefits before reaching your full retirement age. Full retirement age differs based upon the year in which an individual is born, ranging from the age of 66-67. Your benefit will increase by 8% for each year you wait to receive benefits from your full retirement age, all the way through the age of 70. After you reach the age of 70, there is no benefit to waiting to receive social security benefits.

You are able to receive benefits before you’ve reached your full retirement age, however, the benefits will be reduced if you earn over a certain amount per year. Once you reach your full age of retirement, your monthly benefits will return to their full amount and you’ll also receive increased benefits for what was lost over time.

Retiring Early

Individuals who retire before the age of 62 are still eligible to receive social security benefits once in retirement, however, these individuals may face reduced benefits in retirement based on those years without any earnings. Health problems are another reason some individuals may face the point of retirement earlier on than others. Individuals who are unable to work as a result of health complications should consider applying for social security disability benefits which are the same as full, unreduced social security benefits. Once individuals receive social security disability benefits when they reach the full age of retirement, benefits are converted to retirement benefits.

Preparing To Receive Your Benefits

The Social Security Administration recommends contacting them 4 months before the date that you’d like your benefits to begin. Applying for benefits can be completed through their website which also offers helpful planning features for those not yet at the point of retirement or those getting close, including benefit estimates and other helpful calculations. Applications can also be completed by calling. The application process requires you to provide proof of certain documentation including your social security card, birth certificate, as well as W-2 or tax return documentation, and a number of other documents.

How Much Benefit Will I Receive?

The amount you receive in the form of social security benefits will be dependent on a number of factors, most importantly the lifetime earnings that you have paid social security taxes on. The social security administration uses a calculation involving an inflation-adjusted average of your 35 highest-earning work years, which is then plugged into a formula involving taking certain percentages of different earnings brackets for your inflation-adjusted average of earnings. 

The amount that individuals will need to live comfortably in retirement ranges from person to person. Most financial advisors would say you need about 70% of your pre-retirement yearly income in order to live comfortably in retirement. While social security may constitute a portion of your retirement savings, achieving this 70% threshold may be difficult without the use of other retirement savings options such as 401(k)s or IRAs. 

Ultimately your benefit will depend on your level of income before retirement, and the age at which you choose to begin receiving your benefits. For individuals who wait until their full retirement age to begin receiving social security benefits, their benefit in retirement may be as much as 75% of pre-retirement income earnings for low-income earners, 40% for medium-income earners, and 27% for high-income earners. Thus, the social security system is set up in such a fashion that it can benefit low-income earners in a way that does not benefit high-income earners the same way, and alternative retirement savings sources can be beneficial to reaching the recommended 70% of pre-retirement earnings for living in full comfort in retirement.

Understanding Benefit Maximums and Boosting Benefits

Benefits will depend on the year that an individual retires in context to their full retirement age. However, for an individual retiring at the full retirement age of 66 in 2020, the maximum monthly benefit is $3,011. In order to receive the maximum benefit, individuals must have inflation-adjusted average earnings that exceed the Social Security Administration’s maximum taxable income.

As was previously discussed, total benefits received can be increased by waiting as long as possible after your full retirement age, up to the age of 70, to begin drawing on social security benefits. Even if you are unable to wait until the age of 70, individuals that wait even a few months or years can dramatically increase the amount of benefits they’ll receive in retirement. For example, an individual that begins receiving benefits at their full retirement age of 66 can see an increase of as much as 25% in their total benefit than if they were to begin receiving at the minimum age of 62.

When It Doesn’t Make Sense To Delay Benefits

Most circumstances would suggest that waiting as long as you can between reaching the age of 62 and 70 to receive social security benefits is the best option for maximizing benefits. However, it is also true that in specific circumstances in which there is realistic consideration of your expected longevity or situations where spouses plan to receive spousal benefits, that it might make sense not to wait before receiving benefits.

It can be difficult to determine how long we may live, considering there is always the possibility that an untimely occurrence or circumstance could hinder the length of our lives, especially in our later years. Individuals foreseeing an above-average life expectancy should certainly maximize their benefit by waiting to collect as long as possible, but this may not be the best choice for those who are not. For example, if you begin collecting a smaller benefit at the age of 62 than you would at the age of 66, the higher benefit you would receive after waiting a few years will roughly take you until the age of 77 to reach the same amount of benefit you would have received if you began collecting at age 62.

Spousal benefits can further complicate the process of making the decision of when to begin receiving benefits. Spouses are eligible to receive as much as 50% of the maximum benefit that a spouse would receive at the point of full retirement. Spouses who don’t work or who haven’t worked enough to receive a full amount of credits to qualify for benefits are still eligible to receive benefits starting at the age of 62, on behalf of their spouse’s work record. Benefits are limited before waiting until the full retirement age, but there is no added benefit of waiting until the age of 70 to begin receiving benefits. When a spouse dies, the remaining spouse is entitled to receive the higher of either their benefit or their deceased spouse’s benefit. For this reason, many advisors recommend high-income earners to delay their benefit claims since a surviving low-earning spouse will receive the higher benefit check for the remainder of their life.

Investing Your Benefits

For individuals with other sources of income in retirement who don’t need to spend their social security benefit on living expenses, investing your social security benefits could be a beneficial choice for growing this portion of your retirement savings. Some experts even suggest that claiming benefits early and investing with an average return of 8% (the market tends to average returns of 10% on a yearly basis), may increase your retirement earnings as opposed to waiting until full retirement age or the age of 70. While the market is not guaranteed to perform well and may involve more risk than individuals entering retirement are willing to take on, maximizing the potency of your benefits may involve taking them as early as you can and investing them.

Preparing Your Plan of Action

While you don’t need to notify the Social Security Administration until 4 months before receiving your social security benefits, it’s never too early to start thinking about when the best time for you to begin receiving benefits will be. As we’ve seen, claiming benefits early or waiting until your full retirement age (or the age of 70) can be advantageous for individuals in different circumstances. 

Either way, you should be sure to leverage social security benefit calculators and other resources online to understand what your social security benefit will be. In doing so, you’ll put together a better picture of what other supplemental retirement income you’ll be needing to enter retirement feeling comfortable and prepared. Feel free to contact your financial advisor for more information on the best age and time to start thinking about or collecting your social security benefits.