Many clients want to know whether they should start drawing Social Security at age 62 or should they wait until full retirement age or even longer. Since the amount of monthly benefit will be reduced by 25% at age 62, compared to full retirement age, you cannot take this decision lightly.
The age at which Social Security benefits should be claimed, assuming you want to maximize the benefits, is a very individualized decision based upon your earnings once you reach Social Security age, your health, and expected number of years during which you expect to be retired. This last factor is extremely difficult to ascertain perfectly, so there is some guess work in determining which commencement age will provide maximum benefits.
If you continue to earn income while drawing Social Security prior to your full retirement age, $1 in benefits will be withheld for every $2 in earnings in excess of $12,960. In other words, if you start at age 62 and earn $22,960, your earnings exceed the amount authorized by $10,000. Your Social Security benefits will therefore be reduced by $5,000. Not only did you receive a 25% penalty because you started taking Social Security early, you did not even receive all of your benefits. However, for those who earn less than $12,960 per year or who have poor health, starting early can provide significant benefits. This earnings penalty ceases at full retirement age.
If you intend to work past your full retirement age, delaying your Social Security benefits until age 70 will increase your cash flow because you can increase your benefits by up to 8% for each year you delay starting your benefits. If the major wage earner of the family is the older spouse, and the younger spouse expects a lengthy period of retirement, receiving the delayed retirement credits could provide substantial additional cash flow for the surviving younger spouse.
In most instances, the break-even point between starting Social Security payments early, at full retirement age, or at age 70, is generally at around 80 years of age. Therefore, if you expect to live beyond age 80 or you expect your surviving spouse to live substantially beyond the time that you would reach the age of 80, increased monthly benefits can be obtained by starting your distributions later. On the other hand, if your health suggests that you will not live for 20 years past the early starting date or you have earnings below the established threshold for penalties, receiving the early cash flow could make your retirement years much more enjoyable.
Your CPA or estate planning attorney can help you calculate your projected break-even point so that you can better determine the most beneficial date for you to start Social Security benefits.
Wayne W. Wilson