Knowing when to claim is not as cut and dry as it might seem. Over 40% of recipients claim Social Security at 62. Only 3% wait until age 70. Planning when to claim Social Security is one of the most important decisions you face in retirement. You have several options that will help you determine when you should claim Social Security and we’ll go into that in this article.
I know most people reading this are people of action. We have a lot of DIY investors / retirement planners in the audience. There are also folks who outsource their retirement planning but keep a keen eye on their advisors. Whichever camp you fall into, you can be sure that knowing when you should claim Social Security could increase your retirement income by $18,307 per year or potentially more.
When Should I Claim Social Security – The Tools
1) Decision Software – You can use software to help you determine the best age to retire. I had a couple use this software to determine the age at which each of them should file Social Security. The results were eye-opening for the couple and you can read about them here. They were able to add $261,000 to their Social Security benefit over their lifetimes. They did this by rearranging their retirement income for maximum return. They flipped the script on how they originally thought about retirement and couldn’t be happier.
Take a look at the two charts below. The chart to the left (or on top) shows the original Social Security withdraw plan. The chart to the right shows the optimized Social Security claiming strategy. In 2032, the couple will receive $59,791 in Social Security combined. This is $18,307 more than their original withdraw plan shows in 2032 of $41,484.
Now of course you have to take into consideration that on the first scenario, the couple would receive money earlier in their life. The software takes into consideration the present value of all the benefits received over the years and discounts the money back to the present value. This way you’re comparing apples to apples.
The value proposition offered by this software is high given it’s nominal fee to buy compared to the amount you could get out of Social Security over your lifetime.
2) Social Security Spreadsheet – Fellow Optimizers know I love a good spreadsheet. I believe a spreadsheet is only a good tool if you can use it and understand it. I stay away from super-complex mind-numbing formulas to give you a simple to use spreadsheet. It’s really simple. Put in the amounts that you’d receive at age 62, 67 (or FRA), and 70. You can pull these numbers right from the SSA.gov website when you sign into mySSA. You can also get these numbers from various Social Security calculators.
You can access the below spreadsheet via Google Sheet here. You can save a copy to edit yourself by going to File – Make a Copy. Then input the amounts that you’d receive at 62, 67, and 70 in the yellow cells. The columns below and to the right will update with new benefit amounts. Your schedule of annual benefits and cumulative amounts are listed below while the present value of your Social Security benefits is listed to the right of the yellow columns. The present value is important because benefit amounts you receive today are more valuable than benefit amounts you receive next year or five years from now.
You can figure out the break-even point for claiming Social Security at various ages by looking at the cumulative amount of benefits received. For the numbers that I ran, the break-even point is age 81 as you can see in the screen print below. This is the point where the cumulative benefit amounts catch up.
Why does the Social Security break even point matter? That’s the age at which it finally paid off to wait (excluding present value calcs here to simplify). If I claim Social Security at 67, I’ll finally receive the total benefits at age 81 that I would have received if I claimed at age 62. If I claim Social Security at 70, I’ll finally receive the total benefits at age 81 1/2 that I would have received if I claimed at age 62. Then after you reach the break-even point, you’ll get more money faster the later you file.
It’s important to also understand present value when you consider claiming Social Security at different ages. This spreadsheet discounts the annual payment you receive each year back to today’s dollars. I have it set up so that it includes all payments up to age 95 (hey, I’m hopeful). I use the 2-year Treasury Note or thereabouts as the percentage to discount each year. The present value of all my Social Security payments is highest if I wait until age 70 to file, even after not receiving anything from age 62 – 69. The reason for this is that Social Security pays you more if you wait to file Social Security.
3) Online Calculators – The last tool on the checklist is to go to various online calculators to see what amount you’ll receive at various ages. For instance, AARP’s Social Security Benefits Calculator includes a bar chart that shows you how much you’ll receive if you file at age 62 all the way up to 70 (shown below). I’ve also listed links to each online tool that’s worth a look.
- SSA’s Retirement Estimator – SSA’s Retirement Estimator includes your actual earnings history. And if you’re close to retirement, trying to guess future wages and law changes becomes irrelevant. You won’t actually know your exact Social Security amount until you file and hear back from the SSA.
- CFPB’s Planning for Retirement – This tool used data (both pre-FRA reduction factors and post-FRA delayed retirement credits) from the Social Security Administration’s website. This is great news for mathematical accuracy but you’re still receiving an estimate.
- Financial Engines’ Social Security Retirement Calculator – The payment amounts are given in today’s dollars, not future dollars.
- CRR at Boston College’s Target Your Retirement – This calculator assumes prior earnings grew at the same rate as nation average earnings which are taken from the SSA’s wage index. It also assumes you stop working once you receive benefits.
- AARP’s Social Security Benefits Calculator – The AARP calculator assumes inflation and future earnings increase at 2.5% annually, but the user is able to change this rate. The earnings history is estimated based on your income and age. I like the bar chart feature that illustrates how much you’ll receive by age depending on when you file.
- Bankrate’s Social Security Calculator – The Bankrate Social Security Calculator assumes future annual increases in earnings and inflation of 3 percent. You can change it if you want. It’s the only calculator included here that allows the user to adjust the rate of inflation and earnings increases. Bankrate also shows output numbers in future dollars, not today’s dollars.
When Should I Claim Social Security – Other Factors to Consider
Getting the most out of Social Security isn’t just about getting the most money. It’s also about using the benefit to your specific advantage. Here are a few tangential points to consider when claiming Social Security:
1) Dependents – Do you have dependents that count on you financially? If so, you may need to consider how much they’d receive in Social Security income if you passed. Children can get up to 75% of their deceased parent’s Social Security income. You can see the issue with filing early or later here. Filing Social Security at age 62 will automatically decrease the amount of your child’s payout if you die early. Waiting to file will increase the amount your dependent child will receive if you die.
Let’s say you have a 10 year old dependent child and you’re 62 years old. If you claim Social Security at 62, then die at 66, you’re dependent child will only receive 75% of your early retirement benefit amount. However, if you never claim Social Security, then die at 66, your dependent child will receive 75% of your full retirement benefit amount (or thereabouts). This could be hundreds of dollars extra per month for your child when you pass. It could be the difference between them going to a community college and a private school. Or between an old car without airbags and a newer safer car.
2) Spousal Needs – Do you have a spouse who plans to file under your earnings history? If so, it may make sense to wait to file Social Security, at least until full retirement age but 70 is even better. Maybe your spouse could file early under their own earnings history, then file for excess spousal benefits later under your earnings history when you file. Assuming that your spouse’s benefit would be less than 50% of your benefit amount (you have been the primary breadwinner over the years), this option may make sense.
3) Taxes – You should also consider taxes when determining when to claim Social Security. Up to 85% of your Social Security income may be taxed. However, Social Security is tax-advantaged income. Taxes are based on your provisional income, the sum of which only includes half of your Social Security income. You should also look at the required minimum distributions that you’ll need to start taking at 70 1/2. What if being forced to withdraw large amounts from a 401(k) at age 71 puts you in a higher tax bracket? Would it make sense to claim Social Security early so that your income would be lower in your 70’s thus lowering your tax liability. This can be utterly complicated to figure out, especially since the tax law changes and you never know what the future will hold.
Social Security is an extremely complex program. It isn’t easy to figure out when you should claim Social Security based on your specific situation. You have a lot of tools at your disposal, the best of which is a reliable Social Security software that figures out your specific situation and tells you how to best optimize your filing dates. Feel free to comment below with questions on your claiming strategy or email me directly.