For most retirees, Social Security benefits are an important source of income. However, the amount you receive can vary significantly based on when you start claiming them.
You may be eligible to claim Social Security as early as age 62, or you can wait to do so until age 70, when maximum benefits are reached. There are clear reasons to wait, as the size of the benefits taken at 70 can be up to 76 percent higher, adjusted for inflation, than benefits taken at age 62, according to the Social Security Administration.
Yet, research from the National Bureau of Economic Research indicates that only 10 percent of Americans actually wait until they're 70 to claim their benefits. Indeed, there are some situations where it may make sense for someone to claim Social Security as soon as they're eligible, explains Griffin Geisler, a wealth planning consultant with RBC Wealth Management–U.S.
“It's difficult to have a general rule for what everyone should do, because there are so many individual factors to consider, such as taxes, rates of return and longevity," he says.
Rather than looking for a one-size-fits-all rule about when to claim Social Security, Geisler recommends taking an honest assessment of your situation. Examining the following four areas can help you determine the best time to begin accessing Social Security benefits.
1. Retirement date
Before you retire, it's important to know where your cash flow will come from when you no longer have paychecks coming in. Because few Americans still have employer-based pensions, “most people have to build that income stream on their own, using Social Security benefits and withdrawals from their investment portfolio," says Geisler.
The timing of your retirement is crucial for deciding when to begin taking Social Security benefits. If you plan to work and continue earning income until your late 60s or beyond, you can probably delay claiming Social Security until age 70—or close to it.
However, if you plan to retire early, consider whether you have other income sources available to you, such as annuities or a spouse's income, to offset the loss of your wages. Even if you have a healthy retirement portfolio, you may not want to start drawing it down too soon, especially if you expect to spend 20 or more years in retirement. Instead, in the absence of other income sources, it may make sense for the lower benefit earning spouse to file for Social Security benefits early to avoid tapping into your retirement savings right away.
Another important consideration is your health. If you have serious health issues and need to stop working—particularly before age 65 when you can enroll in Medicare—it may make sense for you to claim Social Security early so that you can earn as many benefits as possible while you can.
But if you don't have significant known health concerns, Geisler says, "then it may make more sense to delay Social Security benefits as long as possible to maximize your income for a longer life."
3. Marital status
Your marital status—whether you're married, single, divorced or widowed—may also play a role in your deciding when to start taking Social Security. For example, when married couples both have Social Security benefits and one spouse dies, the survivor will receive the higher benefit. For that reason, married couples should consider delaying Social Security benefits for the higher earner in order to secure a larger survivor's benefit in the long run.
If you are divorced or widowed, you may have the ability to claim Social Security benefits on your former spouse's record—but that can get complicated quickly, Geisler explains.
“Divorced benefits and survivor benefits are very complex," he says. “It's a good idea to work with your financial advisor to find an approach that makes sense for your unique circumstances, because there are often a lot of options."
Finally, consider your tax situation, as 85 percent of your Social Security benefits are subject to taxation (at least 15 percent will be tax free) for many people at the federal level, in addition to being taxed at the state level by 12 states (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia).
"Determining what your tax liability will be can help inform your decision about when to start claiming Social Security," Geisler explains. "For example, if you continue to work, your tax bracket will likely be higher than when you are retired and no longer receive regular paychecks."
Everyone's situation is different, and your strategy for claiming Social Security benefits will depend on your unique circumstances. By working with your financial advisor, you can build Social Security into your wealth plan in a way that makes sense for you.