“When should I draw Social Security?” is a common question that we receive while planning for retirement income. Every individual, or couple, have unique circumstances that factor into providing a clear answer to that question.
Admittedly, this is not a comprehensive guide to determining when you should begin to draw Social Security. However, here are three things I believe everyone should consider before signing up for Social Security Retirement Benefits:
The Cost of Drawing Early vs. Benefit of Delaying
When an investment is evaluated, many individuals look at returns over annual time periods. If we were to view your Social Security Retirement Benefit in the same light, what is the cost of drawing early versus the benefit of delaying?
Your Full Retirement Age (FRA) is the age at which you are entitled to 100% of your Social Security Benefit, and the age at which any reduction or enhancement of benefits is based off. For individuals born in 1960 or later, your Full Retirement Age (FRA) is 67. For individuals born prior to 1960, your Full Retirement Age can be found here.
- If you begin drawing Social Security more than three years from your FRA, your benefit will be reduced by 5% for those years.
- If you begin drawing Social Security within the three-year period leading up to your Full Retirement Age your benefit will be reduced by 6.7% per year.
- Every year that you wait beyond age 67 to draw your Social Security Retirement Benefit, your benefit will increase by 8% per year. This is known as the Delayed Retirement Credit.
The following charts illustrate what percentage of the benefit an individual with a Full Retirement Age of 67 would receive based on filing at various ages:
It’s About More Than You
When you start contemplating filing for Social Security many individuals think back to all the years of hard work and taxes paid that went into providing this benefit – and rightly so. However, did you know your decision on when to draw Social Security can impact more than just yourself? An individual’s Social Security Benefit can impact a benefit that is received by seven individuals! Those individuals include themselves, spouse, ex-spouse, surviving spouse, surviving ex-spouse, parents, and minor children.
Most notably it’s important if you are currently married to review Social Security as a couple before finalizing a filing strategy – especially if there is a significant age gap between spouses. Regardless of the final strategy put in place, it’s important to review and understand what Social Security Benefits would look like for a surviving spouse.
One More Year…
An individual’s Social Security Retirement Benefit is based on a formula that considers your highest 35 earnings years, adjusted for inflation. For example, if you work a job that pays into Social Security from ages 25 to 65, your highest 35 years will be used to calculate your benefit and your lowest 5 earnings years will not be factored in. If you have less than 35 years of earnings, a ‘Zero’ is used for each you do not have earnings and thus reducing your benefit amount.
Generally, individuals have a higher income during the final years of their career. With each additional year of work at the end of your career, you could be replacing a lower income earning year in the calculation and therefore providing a boost to your benefit.
It’s worth noting that in 2023 only income up to $160,200 is taxed for Social Security purposes (also known as the Social Security Wage Base). This puts in place a potential cap, or maximum amount that you could hypothetically receive from Social Security assuming you had earnings at or above the wage base for all 35 years. The maximum benefit you can receive from Social Security in 2023 is $3,627 per month, or $43,524 a year. Check out our podcast on Social Security here.
Andrew D. Boyles
For More Information:
To access updated information regarding your Social Security Benefit, please visit www.ssa.gov.
For more information about Social Security Benefits click here to access a webinar by Baird’s Wealth Planning Department titled, Understanding Your Social Security Retirement Benefits.
If you are a Baird client and would like to engage in Social Security Planning please reach out to your Financial Advisor directly or our office at (270) 467-9664.