Deciding when to take Social Security benefits

Retirees who begin collecting Social Security before their full retirement age can take a significant cut to their benefits -- but there may be a way to "reset" that process and ease those reductions.

|
Bradley C. Bower/AP/File
Trays of printed Social Security checks wait to be mailed from the U.S. Treasury's Financial Management services facility in Philadelphia.

Many current retirees decided to begin taking Social Security retirement benefits well before their full retirement age—the age at which a beneficiary is entitled to receive a full Social Security retirement benefit based on her lifetime earnings record.

In some cases, need drove the decision to take early benefits; in others, fear about the long-term viability of the program. In many cases, the decision came down to the retiree not knowing she had the option to delay benefits.

Regardless of the reason, the consequences of taking early Social Security benefits are significant and ongoing. Assuming a full retirement age of 66 (as it is for those born between 1943 and 1954), taking retirement benefits starting at age 62 results in a permanent 25% reduction in benefits. In other words, if the full retirement age benefit—known as the primary insurance amount—was expected to be $2,000 per month, beginning benefits at age 62 reduces this to $1,500 per month. This reduction is permanent and leads to a shortfall over time because Social Security benefits are indexed for inflation. Given that retirement benefits do not end until the recipient dies, this shortfall can add up to thousands of dollars in lost income.

So what can a retiree do if she later regrets the decision to take early benefits or her circumstances change such that she no longer needs the early income? It turns out there is a way to mitigate this decision after the fact—a “reset” allowed under the Social Security rules. Let’s discuss this process in detail.

Unknown to most retirees, Social Security allows you, upon reaching full retirement age, to stop receiving benefits until sometime in the future. Under the program rules, delayed benefits after full retirement age are entitled to earn credits of 8% per year up to age 70. Beneficiaries whose full retirement age is 66 and who delay benefits until they reach age 70 can therefore receive delayed credits totaling up to 32%.

Let’s take a look at an illustrative example. Jean is a retiree who began her benefit at age 62. Her primary insurance amount is $2,000 and was reduced to $1,500 as a result of her decision to take an early benefit. Upon reaching her full retirement age of 66, Jean decides to suspend her benefit until age 70. This benefit will now earn delayed credits at a rate of 8% per year. When Jean resumes taking her benefit at age 70, it will have recovered 99% of the original primary insurance amount (0.75 x 1.32 = 0.99) and she will receive $1,980 per month, indexed for inflation. This benefit will continue for the rest of her life and enjoy inflation adjustments throughout.

It is true that Jean would have been better off had she delayed taking her benefit until age 70, thereby increasing it to $2,640 per month with delayed credits ($2,000 x 1.32 = $2,640). Still, by suspending her benefit for a while, Jean has considerably improved her situation and effectively undone most of the effects of her prior decision to take an early benefit.

This ability to suspend benefits at full retirement age represents, in effect, a “reset” opportunity for Social Security beneficiaries who later wish to at least partially undo the impact of having taken early benefits. Retirees in this situation are advised to consider taking advantage of this planning opportunity—the result could be significantly more income available to help meet spending needs throughout retirement. Indeed, all retirees would do well to manage Social Security as a form of “longevity insurance” given that this income keeps pace with inflation and lasts for a lifetime. Doing so could be one of the best financial moves they will ever make.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Deciding when to take Social Security benefits
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2014/0419/Deciding-when-to-take-Social-Security-benefits
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe