When to Claim Social Security Benefits

As one approaches retirement, the process of retirement income planning becomes a critical step in determining retirement readiness.

The process helps to answer the question, “Will we have enough money saved to retire comfortably?” Deciding when to claim Social Security benefits is an important decision in this planning process, and it's especially critical for couples. The timing of when each spouse claims benefits can have a significant impact on their overall retirement income. Here are some factors to consider when deciding the best time for a couple to claim Social Security benefits.

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First, the Basics

Before making any decisions, it's essential to understand how Social Security benefits work. Social Security retirement benefits are based on your earnings history, and the amount you receive will depend on when you start claiming benefits. You can begin claiming Social Security retirement benefits as early as age 62, but the amount you receive will be reduced if you start before your full retirement age (FRA). Your FRA is determined by your birth year and ranges from 66 to 67 years old.

If you delay claiming Social Security retirement benefits beyond your FRA, you can earn delayed retirement credits, which can increase your monthly benefit amount by up to 8% per year until age 70. This means each year you wait to claim your benefits leads to a substantial 8% pay raise, yet it also results in receiving one less year of Social Security Income during your lifetime.

Consider Both Spouses' Earnings History

When deciding when to claim Social Security benefits, it's essential to consider both spouses' earnings history. Each spouse is entitled to their own Social Security benefit based on their work history, and the amount they receive will depend on when they start claiming benefits.

For couples who have different earnings histories, it may make sense for each spouse to claim benefits at different times. For example, the lower-earning spouse could claim benefits as early as age 62, while the higher-earning spouse could delay claiming benefits until age 70 to earn delayed retirement credits, which means a much larger monthly paycheck for life. This can allow a couple to maximize their overall retirement income.

Consider Longevity and Health

Another factor to consider when deciding when to claim Social Security benefits is each spouse's longevity and health. If health factors may cause one spouse to have a significantly longer life expectancy than the other, it may make sense for the healthier spouse to delay claiming benefits until age 70 to maximize their monthly benefit amount.

On the other hand, if one spouse has a significant health issue that is likely to shorten their life expectancy, it may make sense for that spouse to claim benefits early to maximize their overall retirement income.

A key point to keep in mind is that the death of a spouse results in the surviving spouse keeping the larger of the two Social Security Incomes, but not both. The smaller income goes away at the first spouse’s death. Therefore, the ability to delay and grow the larger of the two benefits provides a higher income for the survivor.

Consider Other Retirement Income Sources

When deciding when to claim Social Security benefits as part of a retirement income planning strategy, it's essential to consider other sources of retirement income. If a couple has significant retirement income from other sources, such as a pension or retirement savings in IRA or 401(k) accounts, it may make sense to delay claiming Social Security benefits to maximize their monthly benefit amount.

However, if a couple has limited retirement income from other sources, it may make sense to claim Social Security benefits early to supplement their retirement income.

Consider Tax Implications

Finally, it's essential to consider the tax implications of claiming Social Security benefits. Social Security benefits may be subject to federal income taxes, depending on your overall income, but only up to 85% of Social Security is taxable, while the same income taken from an IRA is 100% taxable. Therefore, if a couple has significant retirement income from other sources, claiming Social Security benefits later while enjoying the continued growth of Social Security Income through deferral may result in lower overall taxes during retirement. In other words, grow the less-taxable Social Security Income while living on the always-taxable income from retirement accounts early in retirement.

On the other hand, if a couple has limited retirement income from other sources, it may be necessary to claim Social Security benefits earlier because the income is needed; taxes aren’t the most important factor in their planning.

When to Claim Social Security Benefits: Deciding What’s Right for You

Deciding when to claim Social Security benefits is an important decision for couples approaching retirement and working to develop a retirement income planning strategy. It's essential to consider both spouses' earnings history, longevity and health, other retirement income sources, and tax implications when making this decision. A financial advisor or Social Security specialist can provide valuable guidance and help couples make informed decisions about when to claim Social Security benefits.