Despite dire predictions from some pundits about the future solvency of the Social Security system, millions of Americans are relying on Social Security benefits to provide them with some amount of income during their retirement years. Unfortunately, many of these individuals are unfamiliar with the rules that govern the distribution of Social Security retirement benefits.
Payout and Distribution Options
One of the most common misunderstandings about Social Security is the belief that you can’t claim retirement benefits until age 65. However, there are several different options when it comes to receiving Social Security retirement payouts.
In short, you can elect to begin receiving Social Security benefits as early as 62 years of age. If you do, though, your monthly benefit amount will be reduced a fraction of a percent for each month that you are short of reaching your full (or “normal”) retirement age.
Your full retirement age depends on when you were born. If you were born in 1937 or earlier, your full retirement age is 65. If you were born after 1937, your full retirement age will be somewhere between 65 and 67.
Therefore, if you were born after 1959, for example, your Social Security benefits would be reduced by 30 percent if you started receiving them at age 62. As a result, a $1,000 monthly benefit would be reduced to just $700 — not just until you reach full retirement age, but for the rest of your life.
However, you don’t have to start receiving benefits when you reach your full retirement age — you can wait all the way until you reach 70 to start receiving benefits if you like. If you wait until after your full retirement age (up to age 70), you may be eligible for delayed retirement credits that would increase your monthly benefit. But there’s no benefit to waiting past age 70, so don’t delay receiving benefits past this age.
Keep in mind that your spouse may also qualify to receive Social Security benefits once he or she reaches age 62, assuming that you are eligible for benefits or are receiving them. The amount of money your spouse qualifies for on his or her own (if any) is paid first. However, if he or she qualifies for a higher amount as a spouse, your spouse will receive a combination of benefits that equals the higher amount.
If your spouse starts receiving benefits at some time between age 62 and full retirement age, the benefit amount will be permanently reduced as described above. If your spouse waits until full retirement age to start receiving benefits, the amount will be equal to one-half of your full retirement amount.
According to the Social Security Administration, the amount of Social Security benefits individuals receive over their lifetime averages out to be about the same regardless of when they start receiving benefits. Those electing to receive benefits early will get less money each month, but for a potentially longer period of time. And those who receive benefits later will get more money each month for a potentially shorter period.
Of course, this is based on the average life expectancy of Americans. If you start receiving benefits at 62 but die at age 65, you would probably receive less money than someone who starts receiving benefits at age 65 and dies at age 68 — even though you both received benefits for three years.
So what’s the best strategy for you? This depends on several different factors, the main one being when you would like to retire:
- If you want to retire before your full retirement age and you have accumulated a decent sized retirement nest egg in an IRA, 401(k) or other retirement account, it might make sense to wait until your full retirement age to receive benefits. Before then, you can live on the money in your retirement account. Alternatively, wait a few more years to receive benefits if you can afford to and increase your monthly benefit even more.
- If you want to retire before your full retirement age but don’t have much money saved in a retirement account, you may need to start receiving benefits early to meet your living expenses. But a better idea might be to hold off on retirement for a few more years to build up your retirement account and boost your monthly benefit check.
- If you don’t plan to retire until your full retirement age or later, then it almost certainly makes sense to wait until then to claim benefits in order to maximize your monthly Social Security check.
Also Consider Health
Your health is another factor to consider. Nobody knows exactly how long they are going to live, but your general health condition and your family health history might give you some idea about your potential life expectancy.
If these are both positive, waiting to receive benefits might be smart since the longer you live, the more money you’ll receive over the long term. However, if you are in poor health and/or have a poor family health history, it might be wise to start receiving benefits as soon as you’re eligible.
If you’re nearing retirement, now is the time to weigh these and other factors and determine the best Social Security distribution strategy for you and your spouse.