I often get asked: “Joe, should I file early at age 62, or at full retirement age (FRA), or delay to age 70?” My response is always the same. I know you can’t see me, but imagine me saying this with a big smile on face: “Tell me when you are going to die.”
Most people are taken aback for a second and are like, “What did you say?” Then I explain that part of figuring out when to file is based on your life expectancy. If you are very healthy, your family history is such that both of your parents lived well into their 90s, and you can afford to delay until age 70 (the key word being afford, more on this later in the article), than you should.
To put it simply, if you are going to pass away before age 70, start taking your benefits at age 62. If you live well past age 80, delaying benefits to age 70 is the way to go. For most things in life the reality probably lies somewhere in-between, and that is when all the fun starts.
This section of the article is specifically for single individual filers — single individual assumes that no one else can receive benefits based on the single’s earnings record. If you are married, please also pay specific attention to the section that speaks about couples benefits.
To make things simpler to understand, the concept we are going to assume in this analysis is that your full retirement age is 67.
If you start benefits at age 62, your benefits will be reduced by 30%! Yes, you read that correctly: 30%. Here is the breakdown according to SSA.gov:
- Age 62 is approximately 30%.
- Age 63 is approximately 25%.
- Age 64 is approximately 20%.
- Age 65 is approximately 13.3%.
- Age 66 is approximately 6.7%.
SSA.gov put out a great chart for the reduction in benefits for the different full retirement ages:
You will also need to be careful of the earnings test. The earnings test only applies to filers who have not reached full retirement age. In plain English, if you are still working and file to receive benefits before your FRA, most likely your Social Security benefits will be reduced. The Social Security Administration will deduct $1 from every $2 you earn above the annual limit. The limit for 2016 is $15,270.
William Reichenstein and William Meyer do a great job illustrating this in their book Social Security Strategies.
They illustrate that if a single individual (a single individual assumes that no one else can receive benefits based on the single’s earnings record) lives to age 80, the cumulative lifetime benefits will be approximately the same whether benefits begin at 62, 63, 64, or any age through 70.
Claiming the wrong strategy can be the difference of tens — if not hundreds — of thousands of dollars.
So What Age Should I File as a Single Person?
Great question. I have no idea.
I am sort of joking.
Should I file at age 62, 64, full retirement age, or delay filing to age 70?
Every year you delay from your full retirement age to age 70, your benefits will increase by roughly 8% per year to age 70. FRA is the year you will receive full benefits. For more on this please refer to my other article on full retirement age.
A Case Study
One of the most important factors (if not the most important factor) when deciding when to take your benefit is the age you will die. Let’s look at a case study.
We have a single female, her date of birth is 10/14/1955, her full retirement age is 66 and two months, her estimated monthly benefit is $1,790, her life expectancy is 81, and for simplicity we are not assuming inflation. I used a woman because women live longer than men (sorry guys).
Claiming Benefits Early at Age 62
Her short life expectancy would be to age 71, and her cumulative benefits would be $142,845.
Her given life expectancy would be to age 81, and her cumulative benefits would be $303,045.
Her long life expectancy would be to age 91, and her cumulative benefits would be $463,245.
Claiming Benefits at Full Retirement Age (FRA): 66 and Two Months
Her short life expectancy would be to age 71, and her cumulative benefits would be $103,820.
Her given life expectancy would be to age 81, and her cumulative benefits would be $318,620.
Her long life expectancy would be to age 91, and her cumulative benefits would be $533,420.
Delaying Claiming Benefits Until Age 70
Her short life expectancy would be to age 71, and her cumulative benefits would be $28,067.
Her given life expectancy would be to age 81, and her cumulative benefits would be $308,735.
Her long life expectancy would be to age 91, and her cumulative benefits would be $589,403.
Case Study Analysis
As you can see, if she lives until her given life expectancy age of 81, then claiming early, at full retirement age 70, or delaying to age 70 does not make much of a difference. There is a difference of a few thousand dollars.
However, if she passes away suddenly at the age of 71, she clearly would have benefited from taking benefits early at age 62 (always remember to factor in the income earnings test, the case study was done assuming she was no longer working).
The same can be said if she lives all the way to age 91 — the difference between claiming benefits at age 62 vs. age 70 is over $286,358 in cumulative benefits! I told you this decision was one of the most important you will ever make. Just ask my wife: I am always right. On second thought, maybe not, LOL. ☺
Think About Your Overall Plan
Another huge factor, and I do not want you to downplay this, is how the Social Security benefits factor into your overall financial picture. This where my training with the CFP Board and expertise start to kick in. Your Social Security benefit should be in sync with the overall plan.
This includes but is not limited to your personal investments, retirement investments, real estate assets, pension, other income, etc. The overall distribution strategy should also be assessed to see what the most favorable tax strategies are as well.
I hear this a lot, Joe. I am pretty sure I want to delay filing until age 70, but what if my retirement portfolio performs badly due to negative market performance or my investments are not generating the same amount of income it used to?
I tell the people who ask this question about a really cool strategy from my buddies William Reichenstein and William Meyer, authors of the book Social Security Strategies, known as file-and-suspend.
If you have reached full retirement age (FRA) the Social Security Administration allows you to file for benefits and immediately suspend them. If for some of the reasons mentioned above — or for any other reason — you want to start the benefits earlier than age 70, this allows you to reinstate the benefits back to the filing date.
Strategies for Couples
Joe, I have a spouse. What should I do? Is it different from the single filer’s strategies?
A lot of the same concepts apply, but when trying to figure out which strategy to implement for couples it is very different for you.
Determining the best and most efficient strategies should be centered around spousal and survivor benefits. Married couples not only have to figure out the best claiming strategies based on the rules and case study we just discussed, you also need to factor in how it will affect your spouse.
If you are single, I have great news! You can skip this section because it does not pertain to you.
Before we get into specific case studies and strategies, we first must understand what spousal benefits are.
Spousal benefits are the benefits your husband or wife receives based on your earnings record when you are alive. Survivor benefits are benefits the husband or wife receives after they have died. You guessed it, survivor benefits have a whole different set of rules, but don’t worry I got your back and have written an article specifically about survivor benefits.
What is your earnings record? According to SSA.gov, it is a chronological history of the amount of money you earned each year during your working lifetime.
I am going to be specifically referring to the spouse with the lower earnings record, which is just a fancier way of saying the spouse that earned less money than the other spouse. It could be the husband or wife, it does not matter.
Here are the rules for qualifying for spousal benefits. You must be either:
- at least 62 years of age.
- any age and caring for a child entitled to receive benefits on your spouse’s record who is younger than age 16 or disabled.
One of the most important rules is dual entitlement.
The spouse is entitled to the larger of the benefits based on their earnings record or, if eligible, spousal benefits, which is up to 50% of the spouse’s primary insurance amount.
If you are eligible for both your own retirement and spousal benefits, the Social Security Administration will pay your benefits based on your earnings records first. If your spousal benefit is higher than your own benefits, you will get a combination of benefits equaling the higher spouse benefit.
Let’s look at an example. John and Mary have been married for over 35 years. John’s primary insurance amount at his full retirement age is $2,000 per month, and Mary never worked. Even though Mary does not have any earnings record she is entitled to receive $1,000 per month at her full retirement age.
Does the spouse need to wait until full retirement age to receive the benefit? No. In this is example, Mary could take her benefit at age 62, however just like in the single filer examples her benefit would be reduced. How much will her benefit be reduced? I suggest reading my article The Basics: Full Retirement Age and Social Security.
Let’s use the same example but change things up a bit. Let’s assume that Mary worked her whole life and her primary insurance amount at her full retirement age is $700 per month. When Mary goes to file at her full retirement age, the Social Security Administration will pay her $700 per month benefit, and they will add the additional $300 per month to get her up to 50% of John’s benefit.
Please keep in mind that for Mary to receive spousal benefits, her husband John must have filed and must be receiving benefits, or must have filed and immediately suspended them. In other words, Mary would not be able to start collecting her benefits early at age 62 or even at full retirement age if John has not filed for his yet.
What if I’m Divorced?
You can still qualify for spousal benefits. If you were married to your ex-spouse for at least 10 years, you may be eligible to receive spousal benefits. You guessed it, there are many rules and scenarios. I will have an article specifically for divorced strategies.
The Real World
There are many factors that will determine when you file, and the biggest reason is called the “real world.” No, not the TV sitcom from the 80s, but the “real world.” Let me explain.
Classroom-like discussions I have with people, or discussions in a vacuum, take factors into consideration such as life expectancy and whether or not to delay filing for benefits (like how delaying to age 70 sometimes makes the most sense in regard to the cumulative benefit).
But we all don’t live in a perfect classroom environment and life gets in the way. Sometimes you just need the money, so then filing at 62 is what you have to do! This is what I like to call “wealth management for the real world.” This why it is so important to have a trusted CERTIFIED FINANCIAL PLANNER™ professional to help make these decisions.
Additionally, if you want a comprehensive review, please take a look at our Social Security Solution Program. I put this program together from the feedback I have received from clients and readers of Social Security Teacher. This solution is designed specifically for those of you who want help and guidance in making the best decision for you and your family. I am a CERTIFIED FINANCIAL PLANNER™ professional, and have the experience to help you get there.
Still feel stressed? Do what I do when my wife or six-year-old drives me crazy: sit down and listen to one of your favorite music albums, I promise you it will put you in a good mood. ☺ Personally anything with B.B. King gets me smiling. ☺
Shoot me an email with one of your favorite artists or albums. I would love to hear it. Oh, and of course any questions about Social Security.