Nearly 90% of all Americans age 65 and older receive Social Security income. For most retirees, this income plays a significant role in their retirement budget. But deciding when to take Social Security benefits can be a challenge. The nuts and bolts of the program are difficult to understand, and each person’s retirement plan is unique. Despite the many moving pieces, the Retirement Budget Calculator can give users insights that can help them gain confidence about when and how to start taking Social Security. These are the four important factors to consider when building Social Security Income into your retirement budget
At the bottom of this post we have included a video tutorial that teaches you how to use 3 free calculators to help you make a more informed decision about the best Social Security claiming strategy for your specific situation.
Can I cover the gap?
According to the Social Security Administration, Social Security Income accounts for a third of all income among the elderly. One out of two married couples and 70% of unmarried individuals rely on Social Security for the majority of their income. 1
If you’re not working, there’s a good chance that you’ll need Social Security Income to cover the gaps in your budget. The Retirement Budget Calculator can help you with the cash flow planning aspect of this exercise. It can show you a year by year or even month by month short-fall in your cash flow.
Those who can't draw down from savings to cover the gap will likely need to tighten the belt or start taking Social Security as soon as their paychecks stop coming. Retirees can begin taking Social Security at age 62, but that is considered early retirement. If you start taking the checks at age 62, your retirement benefit will be reduced by 25-30% depending on your full retirement age. To receive your full benefits, you have to wait until the Full retirement age which isn’t until 66 or 67 (for those born after 1960).2
For example, a person who expected to receive $2,000 in benefits at their full retirement age of 67 would receive just $1400 per month if they started taking benefits at age 62.
Even people who plan to take benefits starting at age 62 may need to prepare to cover an income gap if they stop working the month they turn 62.
Social Security is paid one month behind. The January 2021 benefits are paid in February of 2021. A person who wants to start receiving benefits in January won’t see their first check until February. The exact date of the first check depends on your birth date within the month. People with birthdays between the 1st and 10th of the month are paid on the Second Wednesday of the Month. Those with birthdays between the 11th and 20th receive checks on the 3rd Wednesday of the month. And those with later birthdays receive their checks on the 4th Wednesday of the month.
How long can I expect to live?
People who have the means to cover living expenses until their full retirement age (or beyond) can be a bit more strategic about when they take benefits. One calculation that many financial planners recommend is a “break-even analysis”.
If you begin taking benefits at age 62, you’ll receive extra money from age 62 through 67. But from age 67 to the end of your life, you’ll receive fewer benefits.
Of course, nobody knows the number of their days. But the Retirement Budget Calculator uses longevity information from the Social Security Administration to suggest the average length of life you can expect to live, given your current age. The average 65-year-old can expect to live a full two decades more. That means, over the lifespan of a typical person, taking benefits at full retirement age yields more benefits than taking benefits earlier.
If you’re conducting a “formal” break-even analysis using the Retirement Budget Calculator, remember to factor in the option for Delayed Retirement Credits. Each month that you delay taking Social Security (after your full retirement age), you can receive a .67% increase in your benefits (8% per year). This 8% growth is allowed until age 70. Those with a full retirement age of 67 can receive up to 24% more income per check by waiting until age 70.
How much life quality can I get from my Social Security Income?
Of course, life isn’t only about money. Some retirees, especially those with high income or high net worth, may choose to take Social Security early because it can provide “fun money” earlier in retirement. During the first decade of retirement, you may have more physical health to engage in various activities. Perhaps you want to travel, rent an RV, play tennis or golf at a fancy club, or go sky-diving. Taking Social Security Income earlier can give you disposable income to enjoy while you still have peak health.
Will the Social Security program even be around by my full retirement age?
According to the Social Security Administration, the Social Security Trust Fund is expected to be depleted by the year 2035. At that point, benefits will be reduced by 21%. At this time, the Social Security Program as a whole seems politically stable. It is unlikely for the whole program to disappear in 2035.
But if benefits will be cut in 2035, should you take your benefits early? Taking benefits early (at age 62) reduces benefits by 25-30%. If benefits are reduced in 2035, the effect of the cut is compounded by an already lower payment. This could work for a few people who don’t expect to live particularly long lives. However, a formal break-even analysis may be required to decide what makes sense for you.
To do the break-even analysis in the Retirement Budget Calculator, run the numbers both ways. First, see your income and net worth if you begin withdrawing at age 62. Remember to cut your benefits by 21% starting in 2035.
Then run the numbers if you begin receiving income at your full retirement age. Again cut benefits by 21% starting in 2035. For those with expected lifespans that extend well beyond 2035, delaying Social Security is likely to make more sense. However, some people may find that withdrawing at 62 makes more sense.
Run the numbers, but don’t let the numbers run you
At the end of the day, only you can decide when to take Social Security. The Retirement Budget Calculator can help inform your retirement planning. It can help you iron out critical cash-flow details. But your retirement budget is just one part of your retirement planning. Make sure you're taking all parts of your life into account as you step towards the next phase of life.
- “Fact Sheet.” SSA.Gov, Social Security Administration, https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf. Accessed 19 Jan. 2021.
- Social Security. https://www.ssa.gov/benefits/retirement/planner/agereduction.html Accessed 19 Jan. 2021.
- Summary: Actuarial Status of the Social Security Trust Funds https://www.ssa.gov/policy/trust-funds-summary.html Accessed 19 Jan. 2021.