Deciding when to claim Social Security Retirement benefits

TIAA-CREF Individual Advisory Services

Even those who have significant retirement assets and income need to determine the best time to claim Social Security benefits. Learn the key factors you need to know to make this highly individualized decision.

Though Social Security may be only one piece of your overall financial puzzle in retirement, it’s still important because the choices in claiming benefits can make a significant impact on the overall benefit you receive. Nine out of 10 people age 65 and over claim these benefits at some point during their 60s or 70s.1 If you claim early you may receive more actual payments over time, but if you delay you may end up reaping a greater financial reward through higher benefit payments. Targeting the “right” age to begin claiming Social Security benefits is a complex and highly individual decision.

If you are qualified to collect Social Security, you can elect to begin receiving benefits as early as age 62, but there may be financial advantages to waiting until “full retirement age”—the age at which you receive full benefits. Full retirement age is 66 for those born between 1943 and 1954 and will rise to 67 for those born in 1960 or later. Wait beyond full retirement age to claim benefits and benefits increase even more each year until you reach age 70.2 Find out your full retirement age by using their calculator, available at http://www.ssa.gov/pubs/ageincrease.htm.

To make the best decision for your situation, it’s important to understand how benefits are calculated and how your individual circumstances affect your retirement income needs.

The best time to claim benefitsWhile workers are eligible to claim their benefits at age 62, doing so forfeits as much as 25% of the monthly amount a retiree may ultimately receive.3 As a result, many people elect to delay claiming their benefits until they reach full retirement age.

Benefits increase even more if you wait until age 70 to receive them, but it’s important to determine whether foregoing the monthly payment until that age will be offset by the increased benefit payment.4 Work with a reputable financial advisor to help you make the best decision for you, keeping these factors in mind. However, you should be aware that if you apply for benefits retroactively, Social Security will only pay you benefits for the previous six months.

Maximizing benefits: Waiting to claim benefits maximizes your monthly payment. According to the Social Security Administration, if you are eligible to receive a $1,000 per month benefit at full retirement age (66 or 67, depending on the year in which you were born), you will receive only $750 per month if you claim benefits at age 62. However, if you wait until age 70 to claim benefits, that monthly payment increases to $1,320.5

1 Social Security Administration website, October 2015 http://www.ssa.gov/news/press/basicfact.html2 Social Security Administration website. http://www.socialsecurity.gov/retire2/delayret.htm 3 Social Security Administration. “Retirement Benefits,” January 2015 http://www.ssa.gov/pubs/EN-05-10035.pdf 4 Social Security Administration website. Accessed November 2015 http://www.socialsecurity.gov/retire2/delayret.htm 5 Social Security Administration. “When to Start Receiving Benefits,” August 2015, p.1. http://www.socialsecurity.gov/pubs/

EN-05-10147.pdf

Tamara Telesko

Director Wealth Planning Strategies

Andrew Bain

Financial Planner

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Social Security Retirement Benefits

Personal factors: Your individual circumstances will also have an impact on the best time to claim benefits. While thinking about your health and longevity isn’t always pleasant, it’s an important piece of the Social Security puzzle. For example, if you have a family history of longevity and are in relatively good health it may make sense to delay your claim. On the other hand, if you have serious health issues, claiming retirement benefits early may make the most financial sense for your situation.

In addition, your marital status may affect your decision. Spouses are entitled to either the individual benefit they earned or a spousal benefit of up to one-half of the other’s benefit amount. It’s important to determine which is higher and take advantage of the best possible benefit. Divorced people who were married for at least 10 years and have not remarried may be eligible for benefits based on their ex-spouse’s record.6

Employment and tax status References to “retirement” with regard to Social Security don’t mean you have to stop working. You can remain employed and still receive your benefit. However, if you continue working into your 60s and possibly 70s or later, various income and tax factors may affect your decision about claiming benefits. If you are younger than full retirement age and elect to receive benefits while working, your benefit may be reduced until you reach full retirement age.7 The calculations of how much your benefit will be reduced are based on your age and how much you earn over the allowed amount. The Social Security Administration publishes a good overview of this complex calculation at http://www.ssa.gov/pubs/EN-05-10069.pdf.

In some cases, money you receive from earned income and other retirement income can increase the tax obligation on your benefits. For the 2014 tax year, your Social Security benefit may be taxed if you are married and earned a combined household income of more than $32,000, or if you are single or widowed and earned more than $25,000. IRS Publication 915, available at http://www.irs.gov/pub/irs-pdf/p915.pdf, explains the thresholds and calculations.

Depending on your income, as much as 85% of your Social Security benefit may be taxable. State taxes on benefits vary and must also be considered. Combined income from Social Security benefits and earned income may also affect your total tax liability, pushing you into a higher tax bracket and increasing the taxes on both wages and benefits amounts.

Finding your best time to claimDetermining the best time to claim your benefits is a process that should include rigorous analysis of your future needs, current income, and overall wealth management plan. The best time to claim is likely different for each individual—what works best for a neighbor or family member might not be the best decision for you. The Social Security Administration’s website is filled with information and provides a good place to start. However, it’s best to consult reputable financial and tax advisors to determine the best strategy for you.

How benefits are calculated

Social Security benefits are calculated based on “credits.” A worker may earn up to four credits per year, based on the amount of money earned. For example, in 2015, a worker must earn and pay Social Security tax on $1,220 in wages to get one Social Security credit. You must earn and pay taxes on $4,880 to receive four credits in one year.8 You must have at least 40 credits in order to qualify for Social Security retirement benefits. These credits can be earned at any time during your work history and do not need to be earned consecutively. If you stopped work at any time and returned to earn the remainder of your credits, you’re eligible for benefits. Benefit amounts are then calculated based on the worker’s overall wages. The Social Security Administration website offers a retirement benefits estimator (available at http://ssa.gov/retire2/ estimator.htm) to help you understand how much your benefits will be at each age.9

6 Social Security Administration website. http://www.ssa.gov/retire2/divspouse.htm7 Social Security Administration, “How Work Affects Benefits,” 2015, http://www.ssa.gov/pubs/EN-05-10069.pdf8 Social Security Administration website. http://www.ssa.gov/retire2/divspouse.htm9 Social Security Administration, “How Work Affects Benefits,” 2015, http://www.ssa.gov/pubs/EN-05-10069.pdf

This material is for informational purposes only and the statements made above represent TIAA-CREF’s interpretation of applicable law. It is presented with the understanding that TIAA-CREF (or its affiliates, distributors, employees, representatives and/or insurance agents) is not engaged in rendering legal or tax advice.

TIAA-CREF does not provide legal or tax advice. Please consult your tax or legal advisor to address your specific circumstances. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.

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