Budgeting for Retirement: When Should You Receive Social Security Benefits?

You have choices about when to start taking Social Security payments, and those choices affect how much those monthly payments will be. The decision as to when to start drawing Social Security is complex and should be considered carefully. You could lose out on valuable benefits if you start collecting too early.

If you postpone taking Social Security until you reach age 70, your benefit will go up by around 6% to 8% per year. Over the remainder of your lifetime, you could receive 75% more than what you would get if you were to start taking Social Security at age 62. Budgeting toward your target Social Security age can make a difference in quality of life in later years, so it's important to make the decision on when to start drawing Social Security prudently.

When to Start Drawing Social Security: The Basics

Most people become eligible to start collecting Social Security benefits when they reach age 62. What the Social Security Administration defines as "Full Retirement Age" or FRA varies depending on when you were born. For example, if you were born between 1943 and 1954, FRA is age 66. You'll get a larger monthly benefit if you wait until your FRA to start taking Social Security payments.

If you were born after 1960, your FRA is 67. If you were born between 1954 and 1960, your FRA varies. You can check this chart to determine your FRA.

How Much You'll Receive Monthly

The Social Security benefits you receive mostly depend on your lifetime earnings. Your average adjusted monthly earnings during the 35 years when you earned the most are used in calculating benefits. The Social Security Administration applies a formula to those earnings to arrive at your "Primary Insurance Amount" or basic benefit. That amount is what you would receive at your FRA. But if you choose to draw Social Security benefits at age 62, you would receive less. Here are three possible scenarios:

  • Suppose your PIA is calculated at $1,000 per month and your FRA is 66. Should you start drawing benefits at 62, you would only get $750 per month. If you're then lucky enough to live to 95, that will add up to $297,000 total.
  • If you begin taking benefits at your FRA of 66, you'll get $1,000 per month, so if you live to be 95, you'll get a total of $348,000.
  • If you defer taking Social Security until you reach 70, your monthly benefit goes up to $1,320 per month. If you do this and live to 95, you collect a total of $396,100.

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Should You Delay Collecting Social Security?

2012 study by economists from Stanford University and Occidental College found that it's most advantageous to delay drawing Social Security benefits under certain personal and economic conditions. Specifically, you tend to gain by delaying Social Security:

  • When interest rates are low
  • If you are married
  • If you're a single woman rather than a single man
  • If you're part of a two-earner couple

If you're married, deferring the primary earner's benefit is better than deferring the secondary earner's benefit. Obviously, other factors, like availability of other retirement savings and your state of health affect your decision on when to start taking Social Security benefits.

Determining the Best Time to Start Drawing Social Security

If you are trying to decide whether to start drawing from a 401K account or take Social Security, your choice will be partly determined by your 401K investments. If it is heavily invested in low-risk investments like Treasury Bonds, you're earning little to no interest after inflation. You would be better off withdrawing those funds and letting your Social Security benefits grow. If interest rates rise, however, this may change.

Budgeting for Social Security decisions is smart, but complex. Should you file for Social Security before reaching your FRA and continue to work, if your earnings exceed certain limits, part of your Social Security benefit will be temporarily withheld, so factor this into your budgeting as well.

Should you reach retirement age without enough savings to pay for necessities, you may have to start taking Social Security as soon as you're eligible. However many years you have until retirement, budgeting for retirement is critical. Not only will budgeting now increase how much you're able to save individually for retirement, it could allow you to defer taking Social Security and enjoy bigger monthly benefits from there as well.

Budgeting for retirement and for today can begin right now. Mint offers free budgeting tools that sync with your mobile devices and go with you wherever. It's a great way to start managing money better, and you can start today.

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