I've been writing about retirement finances for over a decade, but I still don't know my own answer to one of the most common retirement questions: When should I take Social Security? It's not because I haven't thought about it or researched it. Rather, it's that there are so many key factors involved that I likely won't have an answer until I'm closer to having to make a decision.
You can start Social Security retirement benefits at any age between 62 and 70, with the amount of your monthly benefit increasing the longer you wait within that window. That structure means that the average recipient would receive around the same amount over his or her lifetime no matter when that person started collecting. Of course, no individual is truly average, which makes the decision one based on personal factors that vary from person to person. These six key factors will weigh in my decision.
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1. Am I still working?
I'm very fortunate to have two jobs that I absolutely love. Assuming I'm still working somewhere I enjoy when I approach Social Security eligibility, I expect to wait until at least until age 67 -- my full retirement age -- and likely until age 70. Social Security levels a substantial penalty for collecting before full retirement age while still working. That penalty is as much as $1 for every $2 earned above $17,040 in a year. That makes it largely impractical to collect early if I still expect a decent paycheck.
Assuming I'm still drawing a paycheck, when within that window between 67 and 70 I start collecting will depend in part on how large that paycheck is. If the paycheck is still enough on its own to cover our household's everyday expenses, I'll likely wait until 70. If we're supplementing our everyday living costs by tapping into our portfolio, I'll likely start collecting closer to 67.
2. Am I disabled?
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If I stop working early because I become disabled, I will likely already be receiving Social Security Disability Income. That benefit converts to standard Social Security retirement benefits at my full retirement age.
Despite the fact that I'm in good health today, the unfortunate reality is that disability rates increase with age. While I'm not expecting to become disabled, it is comforting to know that the Social Security decision will already have been made for me, making it one less thing I have to worry about.
3. Am I still making Roth IRA conversions?
As a fan of making investing automatic, most of my nest egg has been built inside my employer's traditional 401(k) plan. Those plans are wonderful during a person's accumulation years, but mandatory distributions from them can substantially raise a person's overall costs during retirement. If I leave the workforce early, I expect to take advantage of lower tax rates to convert some of that money from my traditional retirement account to my Roth IRA.
To make those Roth conversions worthwhile, a person should come up with the money to pay the related taxes from a source other than the money being converted. Taking Social Security early would provide me with a source of funding to pay those taxes without having to deplete as much of whatever money I may have in my after-tax accounts. As a result, if I'm still performing Roth IRA conversions, I'll likely take my Social Security closer to age 62.
4. Can I qualify for an Obamacare subsidy?
Obamacare subsidies for health insurance are based on a household's income. Retirees -- particularly those who haven't started taking Social Security yet -- tend to have far more control over the amount and timing of their income than those drawing a paycheck. If I can keep my income low enough to qualify for an Obamacare subsidy, it would lower my costs of living in early retirement.
Social Security income is included in the income considered when calculating those subsidy levels. If our household's income is below the level where we would qualify to have our out-of-pocket costs limited based on Obamacare's thresholds, it would likely make sense to keep our income down. That would argue for not taking Social Security before age 65, the age at which we'd become Medicare eligible and would no longer have to worry about that particular income test.
5. How's my physical health?
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The women in my family tend to live into their 90s. The men have traditionally passed much earlier. If my physical health remains strong into my 60s, I'll consider holding off on Social Security until I'm closer to age 70. If cancer, blood pressure, diabetes, or cholesterol -- or other such scourges -- start becoming problems I have to face, I'll strongly consider taking my benefits closer to age 62.
Your Social Security benefits generally last until you pass, although your spouse and minor children could get some survivor benefits based on your benefit levels. The crossover point where it pays to wait generally happens somewhere between ages 78 and 81. If in my 60s I can anticipate still being spry and relatively healthy in my 80s, I'll consider waiting. If not, I might as well take the money earlier, while I can still make use of it.
6. How's my mental health?
Many elderly people get scammed out of a large chunk of their money, especially if their cognitive abilities start to wane. If I, my wife, or our children start believing that I am no longer capable of managing our household finances and investments, then I'll turn those responsibilities over to others.
It might seem counterintuitive, but the less confident I am in my ability to manage our household's finances, the longer I expect to wait to collect Social Security. This is because Social Security benefits increase with age up until age 70, and provide fairly reliable, inflation-adjusted income. Therefore, the longer I wait, the higher that reliable, virtually guaranteed income will be and the less I will have to rely on others' financial prowess to enable us to cover our household's costs.
On the flip side, if I remain confident in my ability to manage our money effectively, the earlier I expect to collect Social Security. Because Social Security offers a reliable, virtually guaranteed income stream, the earlier I start collecting it, the less I need to rely on our portfolio to cover our immediate costs of living. Collecting earlier means I can let more of our investment portfolio ride in growth-oriented investments for a longer period of time, potentially improving our overall financial position.
What about the Trust Funds?
Note that I will not be eligible to collect any Social Security retirement benefits before the program's Trust Funds are expected to empty around 2034. As a result, I expect that any patches or adjustments that will take place to extend the financing available to Social Security will be in place before I can do anything about it.
Instead of fretting about those fixes, I'm simply planning for my expected benefits to be cut by around 25% from what my Social Security statements indicate they would be if the program remained solvent. Social Security's Trustees indicate that the program will be able to pay between 73% and 77% of expected benefits once the Trust Funds empty. So, counting on around 75% of what I'd otherwise be able to expect seems like a reasonable approach to take until we have better information.
Decisions, decisions
On average, the overall Social Security benefits a person receives will be about the same no matter when he or she starts collecting. Still, what might be the absolute best call for one person could be a mistake for another. When it's time to ask yourself the question of when to claim your own Social Security, consider these six factors along with others that may matter to you. Whatever age you choose to start collecting, know that if you consider those important to you, you'll likely make a reasonable choice.
