Social Security benefits will be the foundation of your income in retirement. Even if you’ve earned a modest income over the past several decades, you’ve probably contributed over one hundred thousand dollars to Social Security by the time you retire. For others, it could be several hundreds of thousands of dollars.

When you retire, you want to make sure that you get every penny that you’re entitled to. That’s obvious, right?

Woman worried about financial future

But here’s something that’s not so obvious: if you blindly take your benefits at face value or if you rely on a one-size-fits-all strategy without considering your specific financial situation, it could have a domino effect.

It could trigger too much income tax. You could forfeit additional benefits that are rightfully yours. You could pay higher Medicare premiums. Ultimately, it could cost you money in some way, shape, or form. That’s why as many as $10 billion in Social Security benefits go unclaimed every year.

It is critical to understand all of your options when considering how and when you claim you Social Security benefits. It could impact your taxes, your investments, your healthcare, etc. That’s why I’ve put together this two-part blog that reveals the 7 things you need to know to claim your Social Security benefits and how this decision could have a huge impact on your retirement lifestyle.

1. Understanding your Social Security statement and how your Social Security income is calculated.

If you’re not already aware, there are several ways in which you can view your Social Security income statement. The easiest method is probably online at https://www.ssa.gov/, where you can create an account and get safe, convenient access to your earnings records. If you prefer getting your Social Security Statement by mail, you can fill out a request form, mail it to the address provided on the form and you should receive your paper statement in 4-6 weeks.

Once you have your statement in hand, you might question how they came up with the numbers that you see. The Social Security Administration looks at your highest 35 years of earnings – which have been adjusted for inflation and cost of living. If you have worked for over 35 years, the years where you earned the least amount of money are replaced by higher earning years. Typically, this means that your early years of earnings will be replaced by later years. On the other hand, if you choose to retire early and will not have worked for 35 years, each year without earnings will be factored in at zero.

When you look at your statement, you will see your projected benefit at age 62, at full retirement age, and age 70. Depending on the year you were born, full retirement age will be somewhere between 66-67 (details below).

It’s important to note that the projected benefit amount you see on your statement assumes that you continue working at your current income level up to that age. That means if you were to retire at your full retirement age and start drawing Social Security benefits at that point, your age 70 benefits would likely not be as high as initially projected on your statement. Because that age 70 projection assumes you work a few more years, at what is probably a higher earnings rate than what you earned 35 years ago, the actual benefits will probably not match the estimated benefits.

Making the decision on when to begin drawing Social Security will impact the rest of your life, so it is critical that you understand your Social Security statement and what options are available to you.


2. Understanding the eligibility ages of claiming your benefits.

62 is the first age at which you can draw benefits. If you do begin drawing benefits at this age, you’ll receive reduced benefits for drawing before reaching your full retirement age (except for widow/widower benefits, which may be drawn at age 60).  

Full retirement age is the age at which you can draw your full Social Security benefit and is between ages 66-67. If you were born before 1955, it’s 66. If you were born between 1955-1959, every year adds 2 months onto your full retirement age. If you were born in 1960 or later, your full retirement age is 67.

At age 70, you reach the maximum benefit increase.

If you choose to draw early, there’s a reduction in your benefits. Every month that you draw before reaching full retirement age, you lose approximately 0.5%. If your full retirement age is 66 and you draw at 62, you will see a 25% reduction in benefits. If your full retirement age in 67, drawing at 62 means you will see a 30% reduction in benefits.

Additionally, there is a retirement earnings test if you draw early. If you make more than $16,920 of earned income in a year and are drawing benefits before reaching full retirement age, Social Security withholds benefits. For every $1 earned over $16.920, $0.50 in benefits will be withheld. One exemption is that in the year that you reach full retirement age, you can earn up to $44,880 without having any benefits withheld. Earnings in or after the month you attain full retirement age also do not count toward the earnings test.

It’s important to note that any benefits withheld while receiving earned income are not lost. Once you reach full retirement age, your monthly benefit will be increased permanently to account for the months in which benefits were withheld.

Couple studying their finances

At full retirement age, you are entitled to full retirement benefits without an earnings test. You could make $1 million a year in earned income and still get your full Social Security benefit. The maximum benefit you can receive at full retirement age is $2,687 per month, or $32,244 per year (2017).

There is also no marriage penalty at full retirement age. If you’re married and both of you qualify for the maximum Social Security benefit, you both receive the maximum. For a married couple, you could be eligible for up to $64,488 a year in benefits at full retirement age.

You don’t have to start drawing your benefits at full retirement age. There is an 8% per year increase in your benefits, or up to a 32% total increase, until you reach age 70. After age 70, there is no incentive to delay taking benefits– you would simply be throwing money away.

Claiming your Social Security benefits is complicated and confusing. There are an infinite number of options as to how and when to claim your benefits, and every situation is unique to every person. Which leads me to the next point.


3. Understanding the eligibility ages of claiming your benefits.

Knowing that there is a pretty substantial increase in your benefits every year you delay taking them makes it easy to think you should wait to claim.

Well, not necessarily. There are other factors that could factor into your decision.

One of the biggest is, how will delaying benefits affect your investments? For example, let’s say you retire at age 64. You’re the higher earning spouse, and think, “Well, I should wait until I’m 70 to claim Social Security benefits.” But, if you need additional income and you’re not drawing the Social Security benefits, that means you’re going to have to take more from your life savings. Well, how much more do you have to take? And what percentage of your life savings will you need to withdraw each year you delay Social Security? If you have $400,000 saved, but need to take out $30,000 per year to supplement your needs because you’re not drawing Social Security, you may end up gutting your savings. By the time you reach age 70, you may not have the same kind of financial security.

According to a recent study by the American College, 80% of the eventual outcome in retirement with your money is determined within the first 10 years of retirement. Overwhelmingly, whatever happens in the first 10 years you retire is going to impact the long-term outcome. Do you run out of money? How much money can you leave as a legacy?

If you use up a significant portion of your savings because you’re waiting until age 70 to claim Social Security benefits, that could be a problem. You’ve now negatively impacted that first 10 years, and at 70, you may not have enough money.

This week, I was working with an individual in my office, and based upon when she would need to draw income, the amount of money she had, and the amount of income she needs, she will need to draw income as soon as she retires. And if that is age 62, she is going to need to draw Social Security then.

Now, we don’t know what is going to happen in the future, and we have to make assumptions when running the numbers. However, in this scenario, it was very clear that her greatest likelihood of success was best if she goes ahead and draws. If she waits, she is going to have to use too much of her savings.

On the other hand, if you have $500,000 invested and only need to take out $10,000 a year, waiting to draw your benefits might be a solid choice.

You need to be careful when making this decision. Too many advisors say, “Delay, delay, delay!” when talking about drawing benefits because you get those increases. But can you afford to delay? If you have to take out 6% per year or more of your savings for an extended period of time before you reach age 70, that could be problematic.

You may have questions. I want you to feel free to ask me any questions you may have – from drawing for a year or two, to widow benefits, to how Social Security age works. You can email me at askjim@broganfinancial.com. I answer every email personally.