This post was last updated on December 30, 2022, to reflect all updated information and best serve your needs.
Deciding when to draw social security benefits is one of the most important decisions you will make as a retiree. Careful consideration of your specific situation and goals is a must. Don’t wait until you’re eligible to make these important decisions.
NextGen Wealth takes a comprehensive look at the big picture and then “zooms in” on fitting social security benefits into your overall financial plan. There’s a lot of guesswork in knowing your life expectancy and level of health in retirement. However, we can still get a clear picture of when it may be best to turn on social security benefits.
A Brief History of Social Security
The Social Security program you know today all started with the Social Security Act of 1935 as part of the New Deal. This act established Title II which laid out the basic framework for establishing the Old-Aged Reserve Account that was funded throughout a person’s working life. This account was used to pay a benefit to retired workers starting at age 65.
Sound familiar? The details of the Social Security program have expanded over time, but the old-age benefit is fundamentally the same today as it was then. One key component is that the benefit is tied to wages earned during each person’s working life.
Today, the Social Security Administration (SSA) administers the Social Security program. There are nearly 60,000 employees at the SSA. That’s roughly 3% of the federal employee workforce in case you’re wondering.
The SSA administers the wide variety of social insurance programs offered today. These programs provide for survivors of deceased workers, medical insurance through Medicare, old-aged, blind, or disabled worker, and other social insurance related benefits.
Also, the current normal retirement age has increased from 65 to 67. For perspective, the average life expectancy of Americans was 59.9 years for men and 63.9 years for women in 1935. The overall life expectancy for Americans in 2022 was 76.4 years.
How Social Security is Funded
The main Social Security trust fund is the Old-Age and Survivors Insurance (OASI) Trust Fund. This is a reserve of funds to ensure the government can make required payments to beneficiaries. The last reported balance was $2.9 trillion.
Most of the funding for the OASI comes from payroll deductions similar to the program’s inception. This is deducted along with Disability Insurance (DI) and Medicare Hospital Insurance (HI) totaling 15.3%.
If you are self-employed, you pay the whole tax. If not, you and your employer each pay 7.65%. You will see this deducted as the Federal Insurance Contributions Act (FICA) Tax on your pay stubs. Currently, this is only levied on the first $160,200 of pay.
Calculating How Much Social Security Benefit Will I Get
This can be somewhat complicated, but benefits are based on the highest 35 years of taxable earnings in your lifetime. The SSA has a retirement benefits calculator to help you estimate what you might receive in the future. You’ll need to create a my Social Security account to access your earnings history or you can estimate your annual salary amounts.
One major factor to consider is whether you, and your spouse if applicable, have worked 35 years total. You don’t have to work 35 years to qualify. However, averaging in a lot of zeroes will reduce your overall benefits.
When Can I Draw Social Security?
There are three different retirement ages that the Social Security Administration tracks as milestones for benefit levels: Full, or Normal Retirement Age, Early Retirement Age, and Delayed Retirement Age. The monthly benefit amount is lowest if you retire and draw benefits early and increases up to age 70.
Early Retirement and Minimum Social Security Eligibility
In order to start drawing Social Security benefits you must be age 62 and have at least 40 Social Security credits. Credits are earned based on earned income for each year. You can earn up to four credits per year.
In other words, you need to have earned the minimum amount, $6,040 or $1,510/credit for 2022, at least 10 years in your lifetime. However, these don’t have to be consecutive. You could have earned $1,510 per year for 40 years and met eligibility requirements.
The main takeaway is that your benefits are reduced each year you draw before your full retirement date.
Normal or Full Retirement Age
In order to receive your full Social Security benefit payment, you need to wait until you are at least your full retirement age. This changes based on your date of birth, but the current normal retirement age is considered to be age 67.
Delayed Retirement Age
Another option is to wait longer, up to age 70 to get the maximum monthly benefit amount. This gives you what’s called a delayed retirement credit which is an increased benefit amount for waiting after your normal retirement age.
You can receive an increase in benefits of ~3-8% each year after full retirement age. However, there is no increase in benefits after age 70.
Spousal Benefits
One other consideration is that if you don’t qualify for Social Security, you may be able to benefits if your spouse qualifies for Social Security. Also, if your spouse passed away, you can claim benefits based on your spouse’s earnings. If you are divorced or remarry, there are other considerations as well.
Maximizing Your Benefits
Once you know how retirement age can affect your benefit amount, you can start to strategize on when to draw benefits. It is impossible to know with absolute precision what is best (if only we knew exactly how long you were going to live), but we can optimize your choice based on your goals and what we know about your life.
In other words, what are you solving for? Do you just want to get the most money back? Do you want the highest monthly cash flow? Or do you just want to retire early and move on?
Maximizing Monthly Social Security Benefits for Monthly Cashflow
Maximizing the total monthly social security benefits is fairly easy. There’s a calculator on the SSA website to help with this. However, the maximum monthly benefit will always come from waiting to draw until age 70.
If you were born after 1943, each additional year you wait to draw benefits adds ~8%. This is called a delayed retirement credit. The maximum benefit if you were born after 1960 drawing at age 70 is 124% of your primary insurance (benefit) amount.
Depending on your year of birth and how long you delay drawing Social Security, you could receive as much as 130% or more of your full benefit amount. Keep in mind, you technically could wait to draw until after age 70, but you will not receive any additional delayed retirement credits, so it doesn’t make sense to wait any longer than age 70.
Maximizing for Enjoyment Now
You might simply want to be able to retire as soon as possible. Drawing Social Security sooner rather than later might seem like a good option. However, your monthly benefit amount is reduced....forever!
For each year you draw Social Security benefits before your full retirement age, your benefit amount will be reduced by 5/9 of 1% for the first 36 months and 5/12 of 1% for each additional month you draw early. If you draw at age 62, you could be reducing your monthly benefit by up to 30 percent…for the rest of your life!
You might look at the amount you’ll get at age 62 and decide that’s enough for you. Also, if you have a health concern or have a shorter anticipated lifespan, you may want to draw benefits earlier to help enjoy your perceived time left. To be clear, this is different than if you know you are terminally ill. There are other considerations if that’s the case.
Maximize for Total Benefits Paid to You
You might be wondering how to get the most amount of total money back over the rest of your lifetime. You might be surprised at what I found in my example using median income levels.
Our imaginary friend, Max Benny, is a 62-year-old who started working at 18 earning the median income. He finished his working career earning the median income as well. He really is an average joe at heart.
Max calculated that his estimated monthly benefit at age 62 would be $1,507 per month. At age 70, his maximum monthly benefit would be an estimated $2,654. That’s a big difference. However, Max is wondering if drawing earlier at his full retirement age or at age 62 when he becomes eligible would be best.
If Max starts drawing at 62, he will get a higher total lifetime dollar amount until age 83. This is true at any age Max would start to draw benefits - including at age 70 to get the maximum monthly benefit amount. In other words, he would have to live until age 84 for it to be worth it to wait until age 70 to draw Social Security.
Longer Life Span
If Max ends up living longer, waiting to draw could be beneficial. Let’s see what the difference is if Max lived to be 100 years old. He would have received a total lifetime sum of $1.25 million if he started drawing at age 62 and $1.52 million total if he waited until age 70 to draw.
Although living to age 100 is fairly rare in America, some families tend to live particularly long. If longevity is a family trait, you might want to take this into consideration.
Additional Considerations for Drawing Social Security Benefits
It's somewhat straightforward to get a basic understanding of when to start drawing Social Security benefits. However, there are always some other variables at play. We need to zoom out and look at the total picture to make sure we’re not affecting other possible optimization strategies.
Continuing to Work Part-time or Full-time
Even though you are drawing Social Security benefits, you are still able to work. However, you will have to pay taxes on the money you make as well as a portion of your Social Security benefits once you make more than a certain threshold (this only applies if you’re still working and start benefits prior to your normal retirement age). This might also be beneficial to work until age 65 when you become eligible for Medicare.
Roth Conversions
If a Roth conversion strategy is something that will be beneficial to you for tax savings, you want to align this with your decision to draw benefits. The additional income from social security could complicate the taxation of your Roth conversions. This can be an especially important consideration if you anticipate having required minimum distributions (RMDs) from your other retirement savings.
Spousal Benefits
If you are a widow or widower, it may be more advantageous to draw based on your deceased spouse’s benefits, and then switch to your benefit amount later. This is worth looking into at a minimum.
What Are You Really Solving For?
If your head is spinning thinking about all the different nuances to the Social Security system, don’t worry, you’re not alone. Making decisions based on guesses about your own mortality can be a less than exciting exercise. However, these are important decisions to make.
Overall, you want to maximize your quality and enjoyment in life. You probably want to be comfortable in retirement years. Getting the most out of the benefits you spent your working life earning is important as well. Consulting a financial planner to help make sense of your specific situation can help give you peace of mind regardless what you decide.