Activating Your Social Security

The Basics

Social Security benefits include retirement and disability income, Medicare and Medicaid, and survivor benefits. American employers and employees pay into Social Security via payroll deductions. Through these deductions, workers are essentially prepaying for a guaranteed lifetime monthly income paid in retirement.

Most American retirees will need to have worked at least 10 years to qualify for retirement benefits. These benefits are calculated using your average indexed monthly earnings during your 35 highest earning years. A husband or wife may be eligible for a benefit based on their spouse’s work record. Depending on when you were born, benefits generally can be taken as early as 62 years old, but full retirement age for most Americans today is around 67 years old.

Delaying Benefits

There is a step-up in monthly benefits if you delay activating Social Security after you reach full retirement age, so there is a good argument for delaying benefits until you reach age 70.  For individuals born in 1943 and later, this step-up comes in the form of a delayed retirement credit of 8 percent per year for each year after full retirement age. This credit stops increasing at 70 years old. (1)

Workers who activate benefits prior to full retirement age (generally around 67 years old) will receive a reduced benefit. For example, an individual turning 62 in 2018 would be eligible for a monthly payment of $953. At full retirement (66 years and 4 months old in this case), the individual would receive a monthly payment of $1,300, and at 70, that individual would receive $1,681 per month. (2) If we assume the individual lives to 90 years old, delaying benefits until 70 will provide the largest lifetime benefit payout.

Working longer can also increase your monthly benefit amount, because higher lifetime earnings can mean higher benefits at retirement.

Age and Income Factors

If you are working, have not yet reached full retirement age, and decide to activate Social Security, your benefits can be reduced depending on your age and income.  According to the Social Security Administration, those younger than full retirement age during all of 2018 will have $1 deducted from their benefits for every $2 earned above $17,040.  Individuals reaching full retirement age in 2018 will have $1 deducted for every $3 earned above $45,360 until the month of full retirement age. (3)

If you have retirement benefits withheld due to earnings, your monthly benefit will be increased at full retirement age to account for the reduced payments. At full retirement, individuals can keep all their benefits no matter how much they earn.

Social Security and Income Taxes

You may have to pay federal and state income taxes on your Social Security benefits.  For federal income taxes, this generally applies if you have other taxable income in addition to your benefits. For example, individuals with income between $25,000 and $34,000 could pay income tax on up to 50 percent of their benefits. Individuals with income greater than $34,000 could pay income tax on up to 85 percent of their benefits.  Spouses filing jointly with income between $32,000 and $44,000 could pay income tax on up to 50 percent of benefits and on up to 85 percent on income greater than $44,000. (4)

If you have reached early or full retirement age and are still working and receiving a substantial income, it may make sense to delay activating Social Security benefits.

What is the Best Age?

If you are looking at retiring soon, a starting point is to ask yourself what your current cash flow needs are and if you can afford to retire now.  If you are younger than full retirement age, you will be taking a reduced monthly amount for a longer period as opposed to higher payments for fewer years at your full retirement age.  If you wait until 70 years old, your monthly payment will be even greater but for even fewer years.

It is important to think about the other sources of income you will have in retirement and if you still plan to work. A key consideration is how much of your retirement will be funded by Social Security benefits.

This may also be a time to reflect on how long people in your family live and to consider your current health situation.  For married couples, questions about spousal and survivor benefits will come into play.

There are several factors you need to consider as you determine the best age to begin taking Social Security benefits. The more you know and understand about your options, the better chance you will have for planning a successful retirement.