WHEN SHOULD YOU CLAIM SOCIAL SECURITY BENEFITS?
TIMING IS CRUCIAL
George Wilson Adams CPA MBA January 11, 2020
In General
One of the most important considerations for maximizing social security benefits is to make a wise choice on when to start claiming. There are three strategies for when to begin receiving your social security benefits: (1) Claim early at age 62; (2) Claim when you reach normal retirement age defined below; and (3) Defer claiming benefits for at least one year and up to four years. I will discuss each of these scenarios.
Congress changed the definition of retirement age in 1983. Normal retirement age when you can receive full benefits is determined by when you were born. For individuals born in 1938 and later, normal retirement age will increase from the former threshold of age 65. If you were born in 1955 your normal retirement age when you can receive full benefits is age 66 and 2 months. If you were born in 1960 or later your normal retirement age is 67.
Another important fact about social security benefits is that they are based on your highest 35 years of earnings.
Claiming Early
Although the definition of normal retirement age depends on when you were born, age 62 remains the earliest date for claiming social security benefits. The most important consequence of claiming early is the (approximate) 25% reduction in benefits that will apply. Claiming early means your benefits will be about 75% of what they would be at normal retirement age.
Because social security is an annuity for life, claiming early will lock in this reduction for the rest of your life. People make this major financial decision based on many factors including life expectancy, ability to work, financial needs, etc.
Another factor to consider is that if you claim benefits early and are still working, the Social Security Administration will reduce your benefits based on how much you earn from work. This has nothing to do with the IRS.
In some cases individuals who choose to claim benefits early can still change their mind when they reach normal retirement age. They can change their mind at that point and suspend collecting social security benefits for at least one and up to four years. This will increase their monthly future benefit.
Claiming at Normal Retirement Age
Most people start claiming benefits when they reach normal retirement age. But my financial advice on whether to claim benefits is as follows : Don't claim benefits if you are still working and don't need them. Social security benefits could be taxed by the IRS (but not by Maine) - this reduces the value of the benefit.
Defer Claiming Benefits
Once you reach normal retirement age (based on when you were born), you have the option to defer claiming benefits. Each year, for up to four years, you could choose to defer claiming benefits. The consequence of deferral is an 8% bonus. For people who defer claiming benefits up to four years their total bonus is 32% and this is locked in for the rest of their lives.
Here again the decision to defer claiming is a major financial decision determined by many personal factors.
Did You Get Divorced? Claim Benefits on Your Former Spouse
The Social Security Administration will probably not inform you that you could claim benefits based on the earnings of a former spouse if you were married for at least ten years. You must proactively inform the Social Security Administration that you were previously married and provide them with all required information. You will need your former spouse's social security number.
Life Expectancy Is The Biggest Factor To Consider
What Do People Do?
Taxation of Social Security Benefits
This section on taxation refers to taxes charged on social security benefits by the IRS and has nothing to do with the reduction in benefits applicable if you claim early and continue to work. By law up to 85% of social security benefits can be taxed by the IRS based on your filing status:
Single filing status: Social security benefits start getting taxed if your other sources of income (such as wages and salaries) plus 1/2 your social security benefits exceed $25,000.
Married filing joint: Benefits start getting taxed if your other sources of income plus 1/2 of all social security benefits exceed $32,000.
Married Filing Separately: All of your social security benefits are fully taxable.
See IRS Publication 915 for further details, exceptions, etc.
Conclusion
When to claim social security benefits is one of the most important financial decisions you will make in your life. I strongly recommend that anyone struggling with this decision carefully weigh all relevant factors. There are many inter-active software programs and financial advisors available to assist in calculating the best social security claiming strategy.
George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
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Brewer, Maine 04412-2339
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