Deciding When To Claim Retirement Benefits - Keys To Optimizing Social Security Income

By Pacific Life
Photograph courtesy of Pacific Life

Many Americans rely on Social Security as a significant source of income in retirement. However, not everyone understands the rules surrounding these benefits. As a result, they may claim their benefits at a time that’s less than ideal for their circumstances, ultimately losing money in the process.

There’s no magic age for when you should begin claiming benefits—each person’s situation and needs are unique—but there are several factors to consider when optimizing Social Security as part of your comprehensive retirement plan.

Full Retirement Age

To begin strategizing about when to claim benefits, you’ll first need to determine your full retirement age (FRA) as indicated by the Social Security Administration. If you were born in 1960 or later, your FRA is 67. If you were born before 1960, your FRA falls between 65 and 66, depending on the specific year you were born. Although you’re allowed to start claiming Social Security benefits as early as age 62, you won’t receive full monthly benefits unless you wait until your FRA to claim them.

Claiming early can mean missing out on hundreds of dollars per month, which adds up if you decide to begin the process several years early.

Furthermore, if you delay Social Security past your FRA, your benefits will increase by 8 percent each year until age 70. For example, if your FRA is 67 and you wait until 70 to claim Social Security, you’ll increase your monthly benefits by 24 percent. Some retirees are tempted to claim their benefits early and reinvest them; however, other investments may not produce returns large enough to beat the guaranteed 8 percent annual growth in delaying Social Security.

Claiming Early

Because of these rules, it may seem like a no-brainer to delay retirement benefits, but doing so is not a realistic option for everyone. Your health and longevity are major factors in determining how much money you’ll need in retirement. If you are treating a chronic condition and have a shorter life expectancy than average, it may be wise to choose the support of early Social Security payments. Likewise, if you simply need the income, Social Security can be a saving grace.

On the other hand, if you’re in good health and expect to live well into your 80s, it may be wise to increase your benefit by delaying your claim as long as possible (up to age 70). If you want to delay your Social Security benefits but do not have sufficient sources of income, you may consider tapping into retirement accounts, such as 401(k) plans and IRAs, to help bridge the income gap before reaching your FRA.

Coordinating With Your Spouse

If you’re married, your Social Security strategy should also take your spouse’s benefits into consideration. For instance, you may decide that the lower-earning spouse should claim benefits at full retirement age for cash flow reasons, while the higher-earning spouse’s benefits grow until age 70.

Ultimately, to optimize Social Security benefits you need to find the sweet spot—the point at which the higher monthly benefits you’d gain by waiting to claim exceeds the amount of money you’ll miss by not claiming early. For many people, that means delaying claiming Social Security as long as possible. Consult your financial professional for assistance in determining what retirement income options can support your unique circumstances.

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