Social Security Benefits

Social Security is based upon the concept of “Full Retirement Age” (FRA). For individuals born prior to 1955, your FRA is age 66. For individuals born between 1955 and 1959, your FRA increases by two months per year (e.g., if you were born in 1957, your FRA is age 66 plus 6 months). For individuals born in 1960 and later years, your FRA is age 67.

Perhaps the most difficult question to answer about Social Security is, “What’s the best age to start receiving Social Security retirement benefits?” The answer is that there is no single “best age” for everyone and, ultimately, it’s your choice. The most important thing is to make an informed decision, and hopefully, the right decision, for you.

You can begin receiving Social Security retirement benefits early, when you reach age 62. Or when you reach your Full Retirement Age (FRA). Or you can defer receiving Social Security retirement benefits until you reach age 70. If you start receiving benefits at age 62, your monthly benefit will be reduced by approximately 27% (compared with the monthly benefit you would receive at Full Retirement Age) to account for the longer time you receive benefits. This decrease is usually permanent. On the other hand, if you choose to delay receiving benefits until age 70, your monthly benefit will be increased by approximately 32% (compared with the monthly benefit you would receive at Full Retirement Age). This increase is the result of delayed retirement credits you earn for your decision to postpone receiving benefits past your Full Retirement Age. That’s quite a large difference in monthly benefit options.

Would it be better for you to start getting benefits early with a smaller monthly amount for more years? Or wait to receive a larger monthly payment over a shorter timeframe? The answer is personal and depends on several factors, including, in this order:

• Your current state of health. Have you been taking proper care of yourself, both physically and mentally? Eating the right foods? Getting enough exercise? Limiting or avoiding alcohol and tobacco consumption?
• Your family’s longevity. Did your parents or grandparents live well into their 80’s or 90s?
• Your current cash requirements. Do you need the cash received from your Social Security benefits immediately? Or could you live without it for several years?

When thinking about retirement, be sure to plan for the long term. Many of us will live much longer than the “average” retiree, and most women will live longer than men. About one out of every three 65-year-olds today will live until at least age 90, and one out of seven will live until at least age 95.

One more point to consider: let’s suppose you start receiving benefits early, at age 62. Add up all of those monthly benefits you would receive, year-over-year. Now, let’s suppose you defer receiving benefits until age 70. Add up all of those monthly benefits you would receive, year-over-year. Now compare your subtotals, side-by-side. The crossover point – i.e., the point at which your cumulative benefits received early, starting at age 62, equals your cumulative benefits deferred until age 70 – is approximately age 80.

I’ve done the math; if you live beyond age 80, the cumulative benefits you receive by deferring them until age 70 will be greater than the cumulative benefits you receive by starting early, at age 62. If you live beyond age 85, this difference will be dramatic – on the order of an additional $80,000. If you live beyond age 90, this difference will be quite dramatic – on the order of an additional $150,000!

All else being equal, unless you have personal health issues, my recommendation would be to defer receiving your Social Security benefits until you reach age 70.

Through the power of actuarial estimates, it is possible to figure out approximately how long you are likely to live. Researchers have come up with a set of charts, based on data from the Social Security Administration's cohort life tables, that show, given your gender and current age, the probability that you will reach some particular later age.

Naturally, these are based on averages for a particular age group — health conditions and lifestyle choices like diet, exercise, and smoking can vastly alter one's life expectancy.

Regardless, this is important information for anyone who has to think about things like retirement and estate planning.

Here is the chart for individuals who turned age 60 in 2014 (i.e., will turn age 65 in 2018). Clearly, some of the benefits of modern medicine have kicked in. The overwhelming majority of 60 year olds will live until at least 70, and majorities will get to at least 80.

Source: Business Insider/Andy Kiersz, Mar. 21, 2014. Data from Social Security Administration

As these researchers look at younger and younger groups of individuals, they foresee better and better long-term longevity odds as well.

According to a 2016 report by the Center for Retirement Research at Boston College, 90% of Americans begin collecting Social Security retirement benefits at or before their full retirement age. The most popular age to start is 62, the earliest age possible - chosen by 42% of men and 48% of women.

That’s quite surprising, given the life expectancies projected above. If some 57.7% of 60 year-old (in 2014) men have a life expectancy of at least age 80, and some 60.0% of 60 year-old (in 2014) women have a life expectancy of at least age 80, why did such a disproportionate number of men and women begin collecting Social Security retirement benefits at age 62? Here are some possible reasons:

• Force of habit – i.e., “That’s what my parents did.”
• The feeling of security that comes with having a “bird in hand”.
• Fear that the Social Security Trust Funds will become insolvent during their retirement.
• They did not assess all of the options available for receiving their Social Security benefits correctly.

When you reach your Full Retirement Age, you can continue to work and earn as much as you want. You will still receive your full Social Security benefit payments.

If you continue to work regardless of your age, whether as a W-2 employee or by being self-employed, your earnings can increase your monthly Social Security benefit amount — even after you start receiving benefits. Each year, the Social Security Administration (SSA) will check your earnings record if you continue to work. If your latest year of earnings turns out to be one of your highest 35 years, SSA will automatically recalculate your Social Security benefit amount and pay you any increase due.

If you’re younger than Full Retirement Age, you can continue to work and earn as much as you want, too. However, if your earnings (from working) exceed certain dollar thresholds, some of your Social Security benefits payments during the year will be withheld. This is known as a “claw back” provision.

If you are divorced, and your marriage lasted 10 years or longer, you can receive benefits on your ex-spouse's record (even if they have remarried) if.

• You are unmarried;
• You are age 62 or older;
• Your ex-spouse is entitled to Social Security retirement or disability benefits; and
• The benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your ex-spouse's work.

Your benefit as a divorced spouse is equal to one-half of your ex-spouse's full retirement amount (or disability benefit) if you start receiving benefits at your full retirement age. The benefits do not include any delayed retirement credits your ex-spouse may receive.

If you remarry, you generally cannot collect benefits on your former spouse's record unless your later marriage ends (whether by death, divorce, or annulment).

If your ex-spouse has not applied for retirement benefits, but can qualify for them, you can receive benefits on their record if you have been divorced for at least two years.

If you were born before January 2, 1954, and have already reached full retirement age, you can choose to receive only the divorced spouse's benefit and delay receiving your retirement benefit until a later date. If your birthday is January 2, 1954 or later, the option to take only one benefit at full retirement age no longer exists.

If you were a Federal, State or Municipal employ and receive a pension for government work not covered by Social Security, the amount of your Social Security benefits may be reduced or even eliminated entirely.

Up to 85% of the Social Security benefits you receive are taxable income to you. The exact percentage will be determined by your AGI as reported on your Federal Form 1040 income tax return each calendar year.

You should apply for Social Security benefits 3 months before you would like to start receiving them.

You may change your mind regarding any of the above choices and options at any time. You will need to get in touch with the Social Security Administration and complete some forms. Please allow up to 2-3 months for any changes you desire to be implemented.

Much has been written about the projected demise and insolvency of the Social Security Trust Funds sometime during the 2020’s decade. Given the sheer numbers of baby-boomer generation taxpayers who have already retired, or who plan to retire over the next 10 years, doing some simple math certainly makes this concern seem plausible at first glance. The way that Social Security really works - whereby Social Security taxes collected today actually go to pay for Social Security benefits of people who have already retired (similar to a Ponzi scheme) – further contributes to this concern.

That said, Congress is quite unlikely to allow the demise of Social Security to occur for obvious political reasons. In fact, Congress has three simple remedies available that would help to alleviate such concerns:

1. Increase (or even remove) the cap on Social Security taxable salary or wages.
2. Increase Full Retirement Age (FRA) to age 68, perhaps even to age 70. Given our increased life expectancy over the past 50 years due to better medical care and living healthier life styles, this would make a lot of sense. Congress last voted to increase FRA in 1983.
3. In conjunction with Point #2, increase the minimum age at which Social Security benefits can be received from age 62 to age 63, perhaps even to age 65.