When Should You Take Social Security?

Filing for Social Security benefits as soon as you can  — or shortly thereafter —  a few years early may seem like a good idea at first.  The money is there, for the taking, and it is likely a substantial addition to your monthly budget.  But be careful: When you decide to file for your benefits is one of the most critical financial decisions of your life. That’s why it’s important to understand that, typically, the longer you wait, the more money you will likely receive – hundreds of thousands more over your lifetime if you’re able to hold off until age 70.

A little history: Established in 1935, Social Security was set up to help the U.S. recover from the Great Depression. The program acted as a government insurance system to assist the elderly, disabled and veterans with covering living expenses. Today, all U.S. workers pay into the Social Security system through payroll taxes. You’ll pay 6.2% of your earnings up to $160,200 (for 2023) into Social Security, a number your employer must match. Those who are self-employed are responsible for paying the full 12.4% each year. Here’s a primer on Social Security benefits and the most important things to consider before you file:

Waiting Has Benefits

Social Security, on average, covers about 40% of an individual’s living expenses in retirement, according to the Social Security Administration. So if you planned on living off your SSI checks alone, you may find that very difficult — if not impossible — to do, said Tom Margenau, a former chief spokesman for the Social Security Administration. In other words, Social Security was never meant to be a retiree’s sole source of support.

Despite the fact that “Full Retirement Age” hits, depending upon when you were born, somewhere between age 66 and 67, for every year you delay taking benefits between age 62 and age 70, you receive an 8 percent bump in your monthly benefits. Social Security uses your highest 35 years of earnings to calculate what you are paid. Additionally, you want as many high-earnings years as possible, and they often come later in your career.  So, the question you have to ask is: Is it worth it to claim early if you are going to lock in permanently reduced income for your entire retirement? The decision to claim early is often regretted by those in their 80s and 90s. Check your Social Security statement to see your personal  work history and estimated benefit amounts. (Use SSA.gov as your go-to resource.)

Making Up Career Gaps

Other than waiting, what can you do to maximize your Social Security take? Consider working a little longer.  Many people move in and out of the paid workforce during their careers to raise children or care for loved ones. While Social Security uses your highest 35 years of salaries, those years do not have to be consecutive years to count.  That means that adding another year or two of credits to your record at the end of your career can help tremendously.

Something else to consider: You can collect Social Security and work at the same time. Be aware, though, of something called the Earnings Limit. If you’re under full retirement age and are collecting Social Security, any money you earn over $21,240 (in 2023) will be subject to this test — and your Social Security will be reduced by $1 for every $2 you earn.  But, once you reach full retirement age, the money will be returned to you in the form of a higher monthly benefit. 

The Challenges of a Do-Over

What happens if you begin claiming Social Security benefits and then decide you made a mistake? (That happened to many folks who retired during the pandemic, then decided to un-retire a few years later.) There are two ways to undo an early claim. One option is the “do-over.” It must be done within the first 12 months of receiving benefits. You ask Social Security to stop payments and you must pay back 100% of the money you’ve received. Later, generally at full retirement age or later, you file for benefits as if you never made the early claim.

The other option is to suspend your reduced benefit payments when you reach your full retirement age. The idea here is that you put your payments on hold for an additional one to three years. The lower payment amount will be increased up to 8% per year up until age 70. Then, you restart payments at age 70 at a significantly higher monthly payment than you were receiving when you claimed early.

How Long Will Social Security Be Around?

Social Security is a pay-as-you-go model, which means the money you are paying in now is being used for current beneficiaries, instead of being saved for you. The program is projected to run through its $3 trillion trust fund by 2034.

This doesn’t mean that nothing will be left for the next generation, but it does mean that if the government doesn’t take action — which experts believe it will — Social Security may not be running at full steam. Millennials may only receive about 75% of their benefits once they reach retirement age unless the government decides to raise the payroll tax, raise the earnings ceiling or change the benefits formula. The best plan is to ensure that you aren’t relying solely on Social Security. That means you should start investing in more reliable retirement and savings accounts now.