Social Security: When’s the Best Time to Cash In?

Given that Social Security is the primary source of income for the elderly, this topic is of considerable concern. Of Americans age 65 and older, roughly 90 percent of them receive Social Security benefits, the average monthly benefit being $1,294. Because 96 percent of American workers are covered by Social Security, deciding when to take Social Security benefits is a question that applies to many. Do you want less money per month sooner, or do you want to wait for a higher monthly payment?

As of the time of this publication, the full retirement age is between 65 and 67, depending on your date of birth. Most people think that it’s best to wait until at least that time in their lives. There are a few scenarios, though, in which cashing in your Social Security earlier or later may financially benefit you.

Increase your monthly payout

Not only does waiting a few years to retire generally increase your overall earnings through additional income from employment, it also increases your monthly Social Security payments. By waiting a few extra years to retire, your payout is increased in two ways. First, by continuing to work, you are placing more money into the Social Security pot, which increases your benefit amount. Second, you may render yourself eligible to receive delayed retirement credit. This credit can increase your benefit amount by up to 8 percent each year up to age 70. If your full retirement age is 67, for instance, retiring at age 70 will provide you with up to 124 percent of your primary benefit.

Little work history

Eligibility for benefits is contingent upon individual work record. You need 40 credits (four credits per year for 10 years) to be eligible for Social Security. If you are an individual who did not work very much during your lifetime, you may have to spend time accumulating credits before you apply for retirement benefits.

Continuing to work

If you are an individual who plans on working during retirement, there are a few factors you should consider. If you have not reached full retirement age, Social Security will deduct $1 for every $2 you earn over $15,480 annually (if you are going to reach full retirement age during 2014, this changes to $1 for every $3 you earn over $41,400). The manner in which the Social Security Administration makes these deductions is through missing monthly payments, as opposed to reducing each monthly payment.

As an example, let’s say you earn $21,480 annually, you are 62 years old, and you are entitled to a monthly Social Security benefit of $1,000 (or $12,000 annually). Because you earn $6,000 over the limit ($15,480-$21,480), your benefits are reduced by $3,000, and you will not receive your benefit for three months out of the year.

The Social Security Administration does, however, recalculate your benefits once you reach full retirement age, leaving out those months you did not receive benefits. Your payment still may not be as high as it would be if you waited until full retirement age, but you will not be penalized for the months you were not paid benefits.

Illness or lower life expectancy

Life expectancies are increasing. According to the Social Security Administration, about one out of every three 65-year-olds will live until age 90, and more than one out of every seven will live until age 95. If you live until the average life expectancy for someone your age, the Social Security Administration reports that you will end up with the same total amount of money whether you retire at age 62, 70, or any age in between 62 and 70.

Although a difficult consideration, for those who have an illness or other genetic reason to believe they will not live to the full life expectancy, the timing makes a difference. The Social Security calculator is a tool that can help when comparing different situations.

Everyone is different. For some, retiring before the full retirement age is futile because work income is so high, benefits end up being reduced to zero. For others, it’s advantageous to start Social Security early because investing the smaller amount of funds may end up paying off more than waiting for the larger monthly amount. The key is taking into account all factors that impact this personal, and permanent, decision.

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