There is a lot of debate over when a person should start taking their Social Security Benefit. But, one thing is for sure, Social Security makes up a significant part of just about everybody’s retirement income and careful consideration has to be given to the question… “When should I start my Social Security Benefit”?
Almost everyone in the United States, self employed included, participate in the Social Security system. A person can begin receiving (OASI) Old Age and Survivors Insurance benefits as early as age 62, but this will only be a percentage of what they will receive at full retirement age. Most people working today will reach full retirement age sometime between 66 and 67 years old based on when they were born.
So, the question most people ask is, “should I take Social Security as early as possible or should I wait until full retirement age”? There are many elements that go into making this decision but a good place to start is picking a retirement date. If you plan on working past 62, it is most likely best to delay Social Security because the amount you can earn without your Social Security benefit being reduced is very limited. Your income for this calculation is considered by Social Security to be gross wages, or for the self employed, net earnings. If you plan on taking Social Security before your full retirement age and continue to work, check out the Retirement Earnings Test at the Social Security website, http://ssa.gov.
If you take Social Security before your full retirement age, your benefit will be paid out at a reduced benefit rate for the rest of your life. But, if you wait until your full retirement age, you will receive your full benefit. The break-even between taking your reduced benefit at 62 vs. postponing taking your benefit until full retirement age is about 12 years (not counting the time value of money). Meaning, if you start taking your Social Security at 62 or 66 you will have received approximately the same amount by age 78. So, the longer you live, the better decision it was to wait to take your benefit.
Then, there is the fun factor to consider. Most people will be more active in early retirement and therefore may have more “fun” with their Social Security benefit by taking it as early as possible. The bottom line is this is a tough decision with a lot of moving parts, and like most financial decisions a person will have to make for retirement, there are few do-over’s.
(Editor’s Note: Chad W. Winn is a financial advisor and a chartered retirement planning advisor with Wells Fargo).