The best age to claim Social Security is complicated and varies depending on your specific financial situation.
You can start receiving your Social Security pension at age 62, with your maximum Social Security pension at age 70, and your full retirement age falling somewhere in between those two ages based on the year in which you were born.
For example, those of you born between 1943 and 1954 have a full retirement age of 66. If you elect to receive benefits at 62, the amount you draw will be reduced to 75% of the maximum amount of the full retirement benefit.
For those born between 1955 and 1959, your full retirement age is 66 plus 2 months for each year after 1954. Someone born in 1957 will have a full retirement age of 66 and 6 months (66 plus 3 times 2 months).
If you were born in 1960 or after, your full retirement age is 67 and you’ll have increasingly later full retirement age depending on the year in which you were born.
Benefits will be reduced to 70% of the full retirement age amount if you elect to start receiving your pension at age 62.
The rule is the longer you wait to file Social Security, the more you’ll receive.
But it may not always make sense to wait to file for Social Security. There are two main reasons you’d want to file before your full retirement age:
- You need a monthly income – This is the most frequent reason retirees file before their full retirement age. If you need the money, filing early is an option.
- Your tax situation warrants filing early – At times, it may make sense to claim Social Security early to receive more money earlier at a better tax rate. This occurs when you have a very high asset base and would be required to make large withdraws under required minimum distribution (RMD) rules.
Money is worth more now than later.
Not many people consider the time value of money when considering the age in which you should file Social Security.For example, $100 given to you today is worth the same as $110 given to you next year, assuming a discount rate of 10%. What that means to you is that if you get $1,500 if you file when you’re 62, it may be the same or better as if you waited one year and received $1,600 per month.
You might say that it’s more beneficial to wait until you’re 63 and get the $100 per month more but I would argue that, depending on the discount rate, it could actually be more beneficial to take the lower amount sooner.
Knowing the most beneficial age to claim Social Security is one of the most difficult questions to answer. There are many variables that come into play, none of which can be evaluated individually.
Social Security As A Lump Sum
Your Social Security pension can also be viewed as a lump sum asset. Looking at it this way may help you make filing decisions and comparisons to your other assets. For example, a monthly Social Security income of $2,273 discounted at 5% over 30 years is equal to a present day asset totaling $419,300.
Another way of stating this is that if you had $419,300 in a retirement account, you could expect to receive about $2,273 per month. Now you can compare your Social Security lump sum to your other assets.
We’re using a 30-year time-frame since most retirees can expect to be in retirement for 30 years. The 5% discount rate is comparable to a conservative investment return in retirement.
The Social Security lump sum is more beneficial than having the exact same amount in a tax deferred account like a traditional IRA. The reason being Social Security is tax-advantaged, that is that only a maximum of 85% is taxable and for most of us the amount taxable is much lower.
A traditional IRA is fully taxable in retirement.
Looking at your Social Security pension as a lump sum can help you make decisions as to when to file. You could have a lump sum goal amount in mind prior to filing. As an example, you could have a goal to have a $500,000 lump sum equivalent. This translates into a monthly Social Security payment of $2,715 (this amount could be the amount that both you and your spouse receive).
This is a powerful way to look at your Social Security pension. It also shows you the effects Social Security has on your net worth. It is an asset and should be looked at in a comparable way.
So What’s The Best Age to Claim Social Security?
It varies for everyone but some questions you need to ask yourself are:
- Do you need an income now or will you before you reach age 70?
- Do you have a high asset base that would require you to make RMDs at age 70?
- Would it make sense to withdraw from your retirement accounts prior to age 70, then rely on Social Security at age 70 and beyond?
Good luck in your retirement journey!