social security

Choose Social Security Options Wisely or It Could Cost You

Christine R. Schmitz, MA, CPA, PFS, CFP®, LTCP Personal Finance 1 Comment

social security benefits

Did you know that 95 percent of retirees get it wrong when it comes to choosing when to start their Social Security benefits - and it’s costing them trillions of dollars in lost benefits? These are the result of an extensive University of Michigan study, which ran more than a billion simulations for 2,000 retirees based on 500,000 possible scenarios for each. The study concluded that too many retirees choose to claim their benefits earlier than they should - mostly out of concern for their financial security when, in fact, it could be making them less secure. 

So how do you know when to time your benefits perfectly? Here are some key considerations:

How your age affects your social security benefits

You can take retirement benefits from as young as age 62. The benefit available at age 62 is between 70 and 75 percent of your full benefit, depending on your actual full retirement age (FRA). For example, if your FRA is 66 your reduction is 25%. However, if your FRA is 67, your reduction will be 30% because of the wider age gap. When you take that reduced benefit, you lock it in for the rest of your life.

If you wait to start receiving your benefit, you earn deferral credits which increases your benefit by 8% each year until age 70. That translates to a guaranteed 32% increase in the benefit amount for retirees with an FRA of 66. For retirees with an FRA of 67, the maximum increase is 24%. Regardless, the increased benefit is locked in for the remainder of your life. And the higher benefit amount is your basis for all future cost-of-living increases.

If you are eligible to receive an FRA benefit of $2,500 at age 66, your options would look like this:

  • Early retirement benefit at age 62: About $1,875
  • FRA benefit at age 66: $2,500
  • Delayed benefit at age 70: About $3,300

What age should you take your Social Security Benefit?

If you live to the average life expectancy, you will ultimately receive about the same lifetime benefits regardless of which option you choose. In practice, it’s not quite that simple. When choosing when to take your Social Security benefits, you have to factor in your financial and spousal circumstances, health and family medical history.

For example, if your health and/or your family’s medical history means you don’t expect to reach average life expectancy, you may be better off taking benefits early. This might also be the better option if you think you might have a hard time making ends meet. 

But if you expect to live longer than average, you would benefit from a higher payout for an extended period of time. Delaying your benefits for a larger monthly payout can be more beneficial.

Social Security spousal benefits - it's complicated

When it comes to planning retirement benefits around spouses, you’ll need to factor in your current and/or former spouse, the Social Security decisions made by your former spouse, and whether any spouses qualified for full retirement benefits. $10 billion in spousal benefits go unclaimed every year.

With the potential to increase your lifetime income by as much as 25 percent, planning for your Social Security benefits should not be taken lightly. What is best for you will depend on your personal circumstances. Such a critical decision should be based on a comprehensive analysis that includes a projection of your retirement income needs, an evaluation of your retirement portfolio, as well as a detailed spend-down plan. Click the button below to schedule a free consultation with a Glass Jacobson financial planner.

Want to run through various scenarios of what age you should take your social security benefit? Try this social security calculator.

About The Author

Christine R. Schmitz, MA, CPA, PFS, CFP®, LTCP

Director of Wealth Advisory Services Learn More>>

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