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When To Begin Social Security Benefits

by Cochran,Robert Lee last modified Apr 17, 2012 06:20 PM

For those deciding when to begin Social Security benefits, timing is everything.  In spite of—or because of—recent economic turmoil, more Americans are relying on Social Security for their retirement plans.

According to the Social Security Administration, 54 percent of married couples 65 and older receive more than half their income from Social Security.  The shrinking number of traditional pension plans, combined with increased longevity, makes understanding and maximizing Social Security critical.

While the percentages have changed over time, most working Americans are subject to a payroll tax that goes to the Social Security Fund.  A worker earns a credit for each $1,120 of covered earnings, and can earn up to four credits in a year.  In essence, to qualify for retirement benefits, 10 years of covered work are required.

Until 1983, the Social Security retirement age was 65.  Today, most workers qualify for the full retirement benefit between 66 and 67.

These benefits are based on a worker’s 35 highest-earning years.  A complicated calculation reflects changes in average wages, and ultimately results in a primary insurance amount—the amount you’d receive at full retirement age (FRA).

Recipients shouldn’t dismiss this benefit.  In 2011, the average Social Security retirement check was $1,177 per month.  When viewed over a 25-year period, including cost-of-living adjustments (COLA), this equates to over $250,000 in today’s dollars—a hefty sum.  Timing is everything, and you may want to have a financial planner or advisor to assist you in getting it right.


Benefits can begin as early as 62 but with a 25-percent permanent reduction.  Despite this steep penalty, over 70 percent of recipients begin retirement benefits before FRA.  This “bird-in-the-hand” mentality may be understandable, but might not always have the best result.  Delaying benefits until FRA or beyond will result in increased benefits, and may make sense given a longer-term perspective.

However, those who have stopped working prior to FRA and cannot re-enter the work force may find that tapping Social Security early is a necessity.  If this is the case, no amount of number-crunching will derail that decision.

Starting at 62 could mean receiving up to five years of monthly checks before FRA.  With a 2-percent COLA, that’s more than $80,000 in the early bird’s pocket.  Typically, it would take eight to ten years for the larger monthly payments received at FRA to result in receiving more in total payments—the break-even point.

Various situations may call for taking benefits early.  A single person in poor health would find the break-even years hard to overcome.  An individual focused on preserving assets for heirs might apply early because Social Security benefits received could represent assets not used.  While Social Security benefits could be beneficial to your spouse, they would not help your nondependent children.  Finally, many who are concerned about the financial viability of Social Security use this as justification to apply for early benefits.

The 2010 Trustees Report indicates that Social Security ran a deficit in 2010.  After 2014, it is projected to routinely spend more than is taken in, ultimately becoming unsustainable in its current form after 2036.  While it’s highly unlikely to disappear, it is likely to change.  For example, adding needs-based testing, and eliminating or reducing benefits for those with more income or assets, may come into play.


Like fine wine, Social Security payments get better with time.  By waiting until FRA, a worker will receive approximately 40 percent more in his benefit check than he would if he began at 62.  By delaying his application for benefits, the worker will be rewarded by as much as an additional 8-percent increase per year between FRA and 70.  Those increases are what Social Security calls delayed retirement credits.

For example, the Social Security Quick Calculator shows that for a worker retiring in 2011 with $60,000 in earnings, benefits from 62 would be around $1,100 per month.  However, by waiting until FRA, that monthly benefit would climb to over $1,700 per month, and by delaying until 70, almost $2,600.

Social Security is one of the few cost-of-living-adjusted streams of income available to most Americans.  If that COLA compounds on a higher monthly income, created by delaying benefits, it can make a big difference.  In the same scenario mentioned earlier, delaying Social Security to FRA could mean an additional $130,000 by 90.  Delaying to 70 could increase that to almost $180,000.

Additionally, if a worker elects to begin benefits prior to FRA but continues to work, Social Security imposes an earnings limitation, causing the worker to temporarily forfeit $1 of benefits for every $2 earned over $14,160 (in 2011).  Work after FRA does not have a negative effect on benefits.  Additionally, continuing to work may add higher earnings years into the Social Security calculation.


Since 1993, Social Security has been subject to federal income tax.  Basically, if your income—including one-half of Social Security benefits and tax-exempt interest—exceeds $25,000 (single) or $32,000 (married, filing jointly), up to 85 percent of your Social Security may be included as income on your federal tax return.

Two rules that impact many Social Security recipients and their spouses are the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) provision.

The WEP affects workers who are eligible for a pension from an employer that did not participate in Social Security, such as educators or state or local government employees.  Although the WEP does not eliminate Social Security, it negatively impacts the benefit amount for those will less than 30 years of covered earnings.

On the other hand, the GPO impacts the spousal-survivor benefit, which is reduced by two-thirds of the non-covered pension amount.  For many survivors, this will greatly reduce, or eliminate, benefits.

If you’re married, Social Security opportunities and considerations expand.  For example, for couples in which one spouse was a relatively high earner, the high earner should delay as long as possible, to maximize survivor benefits for the low-earning spouse.

The “claim now, claim more later” strategy meets this goal.  The high earner begins benefits based on the low earner’s record at FRA.  This would allow benefits on the high earner’s own record to accumulate delayed retirement credits, thus maximizing their own and survivor benefits, while still enjoying a small income stream in the meantime.  This can only be done at FRA.

Spousal benefits are only available if a spouse is eligible for benefits.  The “file and suspend” strategy is one way for the low earner to begin benefits based on a spouse’s record, but allowing the high earner’s benefits to continue to grow.  Here, the high earner, upon reaching FRA, would file for benefits, thus allowing the low-earning spouse to begin spousal benefits.  The high earner would then turn around and suspend benefits, allowing them to continue to grow via delayed retirement credits, while the spouse continues to receive monthly checks.

Social Security is a complex and valuable benefit.  Employees are encouraged to take the time to master this important component of their retirement-income strategy.  There are a host of financial planners and advisors who can assist in getting it right.



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