Many people are in a headlong rush to claim their Social Security benefits as soon as possible but, depending on their situation, this haste may be making waste.
Precisely when you should claim these benefits is a complex question. The answer depends on various personal factors and running the numbers to assess the upsides and downsides of waiting.
Normally, eligibility for benefits begins at age 62. Many people, unaware of the downsides of jumping too soon, claim as soon as they reach this age. Yet they might not be so quick on the trigger if they realized how much money their haste was costing them. The later you claim – until age 70, when benefits max out – the larger check you get each month.
The decision on waiting involves factors that everyone should consider as they project their various retirement income streams. These factors include:
• Your financial resources. If you have accumulated assets to draw from, it’s easier to wait to claim the greater benefit. It’s important to have these assets because Social Security benefits alone won’t cover expenses for many people.
• Your health. If you’re in poor health, claiming earlier rather than later might make sense, as this reduces the chances that you will die without having claimed.
• Your goals. If you have entrepreneurial goals during retirement and plan to divert much of your assets toward those goals, you may need your Social Security benefits to live on. You must weigh the cost of waiting (lower benefits) against your chances of entrepreneurial success, the amount of income your enterprise is likely to produce and when this income is likely to start.
If you earn income after claiming benefits – from continuing to work in a job, from working in an existing business that you own or from a new business that you start - your benefits might be reduced, depending on your age when you claim. The amounts of these reductions depend on how much you earn and whether you’ve reached what’s known as your full retirement age.
If you were born January 2, 1943, through January 1, 1955, then your full retirement age for social security benefits is 66. If you’re younger than 66, your benefits will be reduced by $1 for each $2 you earn above $15,480. If you reach your full retirement age during 2014, your benefits will be reduced by $1 for each $3 you earn above $41,400 until the month you reach that age.
Once you’ve reached full retirement age and claim, your benefits won’t be reduced no matter how much you earn from your business.
I recently began working with a married couple all set to claim early. Their situation and the alternate strategy they ultimately developed illustrate some of the complexities involved and serve as an example of a way to win the game by understanding its myriad rules.
The man had been the primary income earner and had accumulated a much greater Social Security benefit than his wife. They would have enough money to sustain their lifestyle throughout retirement, primarily because of his pension and their savings. Yet his pension would end upon his death, so his wife wouldn’t continue to receive this money. Naturally, she was concerned about having to live on a reduced income should her husband die.