When Should YOU Claim Social Security?

Social Security is available from the time we turn 62 years old.  But there is a penalty for taking it before our full retirement age–the payment is lowered.  And there is a benefit for taking it later than our full retirement age–the payment increases for every year we defer until age 70.  There is no reason to defer past 70.

For most of my readers, your full retirement age is 67.  For those born between 1938 and 1959, your full retirement age is between 65 and 67.  For those born before 1938, your full retirement age is 65.

Conventional wisdom says if you are in good health, you should wait until age 70 to claim Social Security because that maximizes your payment.  The payment grows 8% per year from your full retirement age until 70.  8% sounds like an amazing increase until you realize you are trading twelve months of payments for that increase.

And conventional wisdom assumes you are living paycheck to paycheck.  You get your Social Security and you spend your Social Security.

If that’s your situation, then you’ll claim it when you need it to pay your bills and put food on your table.

But I suspect many of my readers are in our situation:  We will have other resources available to pay our bills.  We will claim Social Security so we optimize our long-term finances.

When we take Social Security, we will have more money available to invest.  We will essentially be investing our social security payments.

For this exercise, I went to SSA.gov and selected Retirement Estimator, I verified my identity with personal information including last year’s earnings.  I then created estimates of my payments for age 62 (early retirement), 67 (full retirement) and 70 (late retirement) based upon $0 earnings between now and then.  My estimates are below.  You should do the same exercise as your numbers will differ from mine.  The benefits are based upon your highest 35 years of earnings.

SS Estimator

You can see, there’s a huge payment decrease (57%) if I claim at 62 rather than 70.  But keep in mind, I’m giving up $167,520 of payments not including Cost of Living Adjustments (COLA) by claiming at 70 ($1,745 x 12 months x 8 years).

I then created a spreadsheet–Y’all know how much I love my spreadsheets!  This one took these different payment amounts and increased them by a 1.8% COLA each year from now on.  1.8% is the average COLA over the last ten years and should approximate inflation.

If I’m living paycheck to paycheck, spending my Social Security as soon as it is received, claiming at 62 is best unless I live past 76, Claiming at 67 is best unless I live past 79.  I’m planning to live well into my 80’s so for me, claiming at 70 would maximize my lifetime payments.  (Average life expectancy  of someone who reaches age 65 is 84.3 years for men and 86.6 years for women)

SS 1.8 0

There are great arguments for just stopping here.  This outcome isn’t dependent on investment success, economic stability or sustained cognitive abilities as I age.  But I think it’s worth looking at my real scenario.

If I have other resources and can essentially invest my Social Security, the crossover ages change depending on my investment success.

With a 1.8% COLA and 6% investment returns, claiming at 62 is best unless I live past age 84, Claiming at 67 is best unless I live past age 88:

SS 1.8 6


See how 6% almost equalizes the outcomes regardless of the date claimed?  Whichever you choose, you’re within $100,000 of the other decisions if you reach your mid-80’s.  I like this because if I choose to claim early for my peace of mind, I’ll come out OK compared to the other options.  We’re talking over 30 years into the future so $100,000 isn’t much of a difference in today’s dollars.

With a 1.8% COLA and 8% investment returns, all three scenarios come together between age 95 and 97:

SS 1.8 8

But they are virtually identical once I reach 80.  So again, claiming at 62 for my peace of mind wouldn’t be drastically wrong.

This makes me think of my Mother In Law.  She was a real estate agent in a real estate downturn and struggling financially.  She decided to claim when she reached 62.  She died unexpectedly due to medical error at 64.  I’ve always been thankful that she took her benefits early, the money reduced her stress and allowed her some luxuries.

Is it realistic to assume 6% and 8% investment returns?  Who knows what the future will bring but here are the historic returns of the S&P 500 including dividends:

S&P 10 year return 7.6%
S&P 20 year return 6.9%
S&P 30 year return 9.3%
S&P 40 year return 11.5%

What else should be considered before making this decision?

Earnings – if you claim before full retirement age but continue to work, Social Security will withhold $1 of benefits for every $2 earned above a limit ($16,920 in 2017).  The withholding calculation changes for the year you reach full retirement age.  But, you’ll effectively get these amounts back in the form of higher benefit payments once you reach your full retirement age.

Taxes – If Social Security is the only income you receive, you won’t pay taxes on it.  However, if you have other sources of income including wages, interest (including non-taxable interest), dividends, capital gains, pensions etc. up to 85% of your Social Security may be taxed.  The calculation is complicated (surprised?  I’m not).  You’ll need to calculate your “combined income” which includes gross income + nontaxable interest + 1/2 of your Social Security benefits.  If this amount exceeds $25,000 for an individual or $32,000 for a joint return, a portion of your benefits will be taxable.

Lower Paid Spouse – If you are the high earner in your family, your spouse’s Social Security benefit may be based on your earnings and your claiming decision.  The lower earning spouse can either claim the benefit they earned (if any) or a benefit based on half of the high earner’s benefit.  And if the high earner takes their benefit early, the spouse’s share is also decreased and if the high earner takes their benefit late, the spouse’s share is also increased.

If the lower earner claims early, the benefit decreases further.

When one spouse dies, the living spouse can take the larger of their own benefit or their deceased spouse’s benefit.

This area is a particularly tricky one–so tricky I’ve heard stories of Social Security Staff giving incorrect guidance.  If you are in this situation, it may pay to have an expert help you navigate your claiming decision.

Health Insurance under the ACA – Social Security benefits are included in the calculation of Modified Adjusted Gross Income.  So claiming benefits may cause a family to lose their health insurance subsidies.  Mr. Ms. Liz turns 62 next year (I’ll pause while you gasp!).  If he claims Social Security, we will need to manage our other income sources so we remain below the limits for the Obamacare subsidy.  This will likely mean he will not be able to continue his tax free conversions of traditional IRA to Roth IRA accounts.  With healthcare in flux, we’ll have to watch this impact closely.

So, what do you think?  Does this make you think differently about when YOU will claim your benefit?

Want to read more about this?  Check out my Social (in)Security is Complicated!

This stuff is super complicated and missteps can affect you for decades–consult an expert before doing anything with your own Social Security.

Source:  Social Security for Dummies by Jonathan Peterson

Photo credit:  Ms. Liz in Knowles Canyon, Lake Powell, Utah. ahhh my happy place!

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

12 thoughts on “When Should YOU Claim Social Security?”

  1. Thanks for sharing. I have been talking with my mom about when she should start drawing Social Security. She is 63 now and has deferred payment thus far. MY dad is 75 and drawing SS while also working full time. His checks will be higher then hers and so figuring out his death benefit (though we hope he is with us another 25 years) also come into play.

    1. Thanks DDD!

      You’re a spreadsheet guy–run the numbers and you may be surprised what works best.

      Like your parents, we have a large gap in age so our calculation will be more complicated than most. Fun stuff!

  2. Thank you for doing a detailed analysis. I suspected that it would be something like this. Right now, I am too far away from that. I have a question for you since you have thought about this. My husband and I earn similarly, we should have similar benefits. Is there a reason to delay one of the benefits? Or can I just do the same calculation with a sum of benefits?

    1. If you are of a similar age, I wouldn’t think it would be a benefit to delay either of your benefits. However, if he is older than you, it may pay for him to delay his benefits. His more advanced age combined with your longer expected lifespan would mean you would benefit from his higher payment if he dies before you. I’d recommend reading the Claim Now, Claim More Later section of this AARP publication.

      This is the situation we are in, Mr. Ms. Liz is 8 1/2 years older than me so it would probably make financial sense to delay his benefit. When he reaches early and full retirement age, we’ll study our ACA subsidy situation as well as our taxable income situation and try to figure out when it makes sense to claim. But, he may end up claiming earlier just for his peace of mind and, since we keep our money separate, it will be his decision.

      Thanks for your comments Busy Mom–we may need to change your name to busy reader! It made me happy to wake up and see all of them 🙂

      1. I was hoping you left a reply, and kept going through your posts to find at least one of my comments. Did you know that goes search bar doesn’t search through comments? I am learning something every day…

        Thanks for your reply. We are only 5 months apart in age. We have quite a few years to go, so have not really thought about it.

  3. Finished the whole thing today! It was so nice reading it.

    About my tattoo – I haven’t got a single good photo of it. It might be the position of it, or my wrist looks bad, or I think it looks bad 🙂 I will make a few more attempts and send you the best one in a couple of days. May be you shouldn’t make it your featured photo, though. The rest of your pics are so nice…

    1. Wow, every article? That is an amazing feat and worthy of a gold star! Thank you for the time you invested and for your great comments. What will you do for fun next? My Tuesday posts will seem too far apart 🙂

      No worries on the picture–we are our own worst critic.

        1. This makes me so happy BusyMom! Thanks for all of your time reading my work and your great comments!

          Congratulations on taking the leap and starting your blog! I love your bravery for putting your goals and net worth out there for all to see. I love how you walk through what you are feeling with each post. It took me about a year of writing before I was able to open up like that. So Bravo!

          It seems like your blogging goals are pure–to document your journey and to help people with theirs. I have received the most value from being part of this FI/RE community and encourage you to tweet and interact with others in this space. Keep at it and reach out if I can help.

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