Social Security: Choosing When to Claim

Social Security has been in the headlines lately and it's actually some good news.  With stark inflation rises , some are saying that the Social Security cost-of-living adjustment (aka, COLA) for 2023 will be 8.7%.  This is on top of a COLA of 5.9% in 2022. 

With the Social Security benefits increasing at a time when the broader market is declining, it really begs the question: when should you start to claim Social Security?

Before You Retire

Your monthly Social Security Benefit amount is calculated based on the number of years you have worked and the taxes you have paid into the Social Security Benefits program. Social Security counts the years you have paid taxes as “credits” for years that you have worked. For example, if you were born in 1929 or afterward, you must have 40 credits to receive Social Security benefits when you retire. This is equal to about 10 years of work.

Your benefit amount is also calculated by the number of credits you have earned during your working years. Fortunately, the Social Security Administration has made it easier for you to verify your expected benefits by setting up an online account. It is worth double-checking your earnings to catch errors, if any, and factor in your expected benefits as you strategize for retirement.

What Age Should You Claim?

There are several ages that should be considered when deciding when to claim Social Security.

• Early Retirement Age: The earliest age you can claim Social Security benefits is 62. However, if you claim Social Security early, you will be penalized for not waiting until the full retirement age.
• Full Retirement Age: This is the age when you are eligible to receive the full amount of your Social Security benefits. The full retirement age is calculated based on the year you were born. For example, for those born between 1943 and 1954, the full retirement age was 66. If you were born between 1955 and 1960, the full retirement age goes up to 67.
• Delayed Retirement Age: You can also delay the claim of your retirement benefits until age 70. If you wait until then, you will continue earning benefits. However, benefits stop accruing at age 70, so there may not be any reason to delay the claim of benefits past age 70.

Key Thoughts

1. It's critical to note that there is not one single "correct" answer for when you should take Social Security benefits.  Timing Social Security benefits is a customized calculation.
2. For every year you delay claiming Social Security beyond your Full Retirement Age an additional 8% per year will be added to your benefit until it maxes out at age 70.  So, if you are in good health and capable of delaying – meaning you don't need the extra money – it’s likely a good move.
3. If you live to at least 83 it probably makes sense to delay taking your benefit beyond Full Retirement Age.  This is what the math tells us, but sometimes personal finance is not just about the numbers!  And besides, who knows exactly long they are going to live???
4. Taking Social Security benefits can help you alleviate pressure from your retirement portfolio.  If you are withdrawing more than 4% (a basic rule of thumb for withdrawal rates) from your retirement portfolio and you still have not claimed Social Security, it may be time to reconsider your strategy.  Taking Social Security might allow you to keep more invested in your retirement portfolio instead of withdrawing funds from it.  This is especially interesting and important in the current 2022 bear market.  

Deciding when to claim Social Security benefits is an important decision to make as you approach your retirement age. If you are interested in a customized analysis, please SCHEDULE A MEETING with us at your convenience.