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Revisiting the Social Security Decison



A few years ago, we responded to a Frequently Asked Question about Social Security: When is the best time to begin receiving one’s Social Security benefits?


Fast-forward to 2015. Given that most of us must now take on a greatly increased share of our own post-retirement risk, it’s no surprise that the question of how to get the most out of our Social Security retirement benefits remains as frequently asked as ever.


Then and now, there are plenty of details to consider in determining the right decision for you and your family. Today, we offer an update on some key considerations influencing how and when to fit Social Security into your well-crafted financial plan.


From Age 62 to Full Retirement Age (FRA): Permitted vs. Prudent Payouts

When you can start receiving your Social Security retirement benefit is quite a different issue than when you should start. Many people assume they should start collecting as soon as they can -- at age 62, by law. That, however, may or may not produce the best results for everyone.


If you're under full retirement age, patience could well pay off. Although you can start getting a Social Security retirement benefit as early as age 62, if you start before what's termed your "full retirement age" or "FRA," your benefit will be reduced for the rest of your life. You can find your FRA in the following table, which also shows the percentage by which your lifetime benefit will be reduced if you start receiving it at age 62:

Year of birth

Full retirement age

Reduction in lifetime benefit if payments begin at age 62

1937 or earlier




65 and 2 months



65 and 4 months



65 and 6 months



65 and 8 months



65 and 10 months






66 and 2 months



66 and 4 months



66 and 6 months



66 and 8 months



66 and 10 months


1960 and later




From Full Retirement Age Onward: Delay for More Pay

Once you reach your FRA, you still don't have to start taking your benefit right away -- and in fact, you will have an incentive to delay beyond that age. When you put off payments past your FRA, you will earn delayed retirement credits of up to 8% a year, based on your year of birth. This will enable you to build a larger -- perhaps significantly larger -- retirement benefit. You are required to start taking your benefit no later than age 70.


Beyond taking your benefit before your FRA, another factor that can trigger a reduction in your benefit, albeit a temporary reduction, is continuing to work while you're collecting Social Security. If, in any year, you have not yet reached your FRA and your earnings exceed a given level, called a "retirement earnings test exempt amount," Social Security will withhold a portion of your benefit. More specifically:


·       Before the year in which you will reach FRA, your benefit will be reduced by $1 for every $2 by which your earnings exceed the annually updated exempt amount ($15,720 in 2015).

·       As of January 1 of the year you will reach FRA, the reduction will change to $1 for every $3 by which your earnings exceed a higher annual exempt amount($41,880 in 2015).

·       On the date you reach your FRA, the reduction based on the earnings test will end. Also, going forward, your benefit will be increased to account for amounts withheld due to earlier earnings.


A Balancing Act: Present Value vs. Future Longevity

Given the above basic information about how Social Security retirement benefits work, at least two factors should color your decision about when to start collecting your benefit:


·      Which starting date will maximize the present value (PV) of the total amount of payments you are projected to receive over your lifetime?

·      Which starting date will minimize longevity risk, that is, the risk that you will run out of money in your lifetime?


A study conducted by William Meyer and William Reichenstein, PhD, CFA, offers helpful guidance in addressing these factors. We'll summarize the study's key findings below, for single persons and married couples.


For a single person with average life expectancy who is no longer working, the PV of total lifetime Social Security retirement benefits is approximately the same no matter when payments begin. Therefore, to maximize the PV of projected benefits, Meyer and Reichenstein say that singles with shorter life expectancies should generally begin benefits early and those with longer life expectancies should generally delay in order to continue building greater benefits. However, maximizing PV is just one side of the coin to consider. Meyer and Reichenstein also report that to minimize longevity risk, Social Security payments should start at age 70.


So, which should you make more of a priority: maximizing PV or minimizing longevity risk? You need to balance both objectives, reflecting on your personal circumstances.


In the case of a married couple, one spouse's choice of when to take a retirement benefit can affect the other spouse's benefit as well. For couples, decisions on when each spouse should start taking his or her benefit should focus on spousal and survivor benefits.


Generally, a spouse who has reached age 62 is entitled to receive the higher of a Social Security retirement benefit based on his or her own earnings history or a "spousal benefit" equal to 50% of the retirement benefit the other half of the couple is entitled to. As discussed previously, reductions for starting before reaching FRA will apply in either case. Also, upon the death of a married person receiving a Social Security retirement benefit, the surviving spouse will receive the greater of his or her own retirement benefit, including any cost-of-living adjustments (COLAs), or the deceased spouse's retirement benefit, including any COLAs.


In cases where one spouse earned more than the other over the years, delaying the retirement benefit of the higher-paid spouse can yield positive results for the couple. This “split-age” strategy in which the lower-paid spouse collects as early as age 62 and the higher-earning spouse delays until as late as age 70 can result in a significantly higher benefit while both are alive, and preserve the higher benefit amount for a surviving spouse.  


Digging Deeper Than the Rules of Thumb

Rules of thumb aside, if you're married, there might be a better way for you and your spouse to make the most of Social Security. For example, it might make sense for each of you to start getting a retirement benefit at FRA or earlier, or for each of you to delay until age 70. It depends on your personal circumstances.


It's important to dig deeper. Don’t assume that putting off collecting Social Security -- or starting payments sooner rather than later – is the right answer in your situation. Learn more about Social Security at www.ssa.gov. Use the Benefits Estimator on that site to see benefit projections at different ages. To get more guidance, speak with a representative at your local Social Security Administration office or over the telephone.


It's also critical to consult with a trusted financial advisor before making any decisions about Social Security. The choices you make will impact your financial security for the rest of your life.

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