When should you begin to collect Social Security?


Recently, we were privileged to listen to an hour-long presentation from a local representative from the Social Security agency. Many of us were astounded at the complexity of the rules and wowed at the knowledge possessed by our presenter.

Social Security is a complicated program that offers tremendous benefits to recipients but also requires an intimate understanding of the details and opportunities that the program affords.

The question that we hear the most from clients is this: When should I begin to collect Social Security?

Generally, workers are eligible to begin receiving benefits once they reach age 62. However, the earlier a worker begins to collect, the less monthly benefits the worker receives. When a worker reaches full retirement age (ranging between 66 and 67, depending on year of birth), then monthly benefits are not reduced. Finally, if a worker chooses to collect after full retirement age, then the worker will be eligible to receive an increased monthly benefit. According to the Social Security Administration, if you live to your average life expectancy age (age 86 for a 62-year-old woman and age 84 for a 62-year-old man) the present value of the benefits should be the same whether you collect early, at full retirement age or at age 70.

Why should I take Social Security before my full retirement age?

Some advisors believe that it's best to draw immediately when eligible. Quite often it is hard to pass up the opportunity to start drawing even if it’s at a reduced rate. More importantly, many people simply need to start withdrawing at age 62 because there may be an immediate need for additional income. They are willing to give up additional dollars in the future to start collecting immediately.

Other reasons for early withdrawal include health issues that create a shorter than average life expectancy, underemployment, and unemployment. In addition, drawing early allows for tax-deferred retirement accounts to continue to grow untouched for a longer period of time. For clients with low taxable income, early withdrawals are more common because very little (if any) of the benefits are taxable.

Why should I wait to take Social Security until full retirement age?

One reason people choose to collect at full retirement age is psychological. For those that withdraw early, the benefits are reduced. That reduction is viewed by some as a penalty. No one wants to “pay” a penalty, especially to the government!

On the flip side, others believe that the increase earned by delaying does not outweigh the fact that they are fully vested and entitled to 100 percent of their benefits. Some view this as a loan to the government — and not everyone is comfortable giving the government access to their money.

Another important factor in waiting to draw until full retirement age is life expectancy. Some practitioners suggest 80 years as a good cutoff point. If the person reasonably expects to reach that age, then it may be wise to wait until full retirement age to collect. Lastly, for workers that choose to be employed beyond age 62 and draw early, their monthly benefit may be reduced further due to continued earned income. Those that choose to work beyond age 62 should strongly consider delaying drawing benefits until full retirement age.

Why should I take Social Security after my full retirement age?

Many advisors believe that waiting until full retirement age is optimal if you’re healthy and you don’t necessarily need the money beforehand. In addition, Social Security income is guaranteed to increase 8 percent each year you delay the start of taking benefits. Therefore by delaying the withdrawal, you’re essentially earning an 8 percent (plus cost of living) increase on your benefits. That may be better than many of your other tax-deferred retirement investments. Keep in mind that to enjoy the greatest return, you will need to live well into you mid-80s.

What other nuances do I need to consider?

You can see that there's little black and white when it comes to Social Security. Typically we find that it's a fact-and-circumstances decision that is based largely on personal preference and ideology. One thing is for sure, as age 62 approaches everyone should start thinking about Social Security. Unlike other government websites, www.ssa.gov is extremely user-friendly, informative and full of helpful content. We suggest spending time on that website to familiarize yourself with Social Security. And as always, call your advisor to further discuss the mechanics and logistics of Social Security.

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Steven Struck, CPA, MST, CSEP is a principal at Baker Holtz in Grand Rapids and carries the special distinction of being the only Mets fan currently living in the area. When he’s not busy signing autographs, his responsibilities at Baker Holtz include generating and implementing tax-saving ideas, advising clients on mergers and acquisitions and tax planning for businesses and their owners. Outside of work, Steven serves on the finance committee at Legacy Christian School and is the treasurer at his home church, Brookside Christian Reformed. He holds a B.S. in accounting from Calvin College and a master of science in taxation from Grand Valley State University. Steven can be contacted at sstruck at bakerholtz dot com.