Social Security Benefits: Why waiting to claim may be the right choice


When it comes to preparing for retirement, deciding when to claim Social Security retirement benefits is one of the biggest decisions you’ll make. Ninety-six percent of U.S. workers are covered by these benefits, which were designed to supplement other forms of retirement income.

For many retirees, Social Security retirement benefits are an important income source. Nine out of 10 people age 65 and over claim Social Security benefits, and they average nearly 40% of total income of people in this age bracket. For many — more than half of married couples and 74% of single people — Social Security benefits make up at least half of post-retirement income.1

Workers can elect to begin receiving their benefits as soon as age 62, but there may be financial advantages to waiting until “full retirement age”—the age where they receive full benefits. Full retirement age increases based on when you were born and ranges from 65 to 67. Wait beyond full retirement age to claim benefits and they increase even more each year until you reach age 70.2 Find out your full retirement age by using the calculator here .

Choosing when to claim your benefits is a highly individual decision. It’s important to understand how benefits are calculated and how your individual circumstances affect your retirement income needs.

How benefits are calculated

Social Security benefits are calculated based on “credits.” A worker may earn up to four credits per year, based on the amount of money earned. For example, in 2013, a worker must earn and pay Social Security tax on $1,160 in wages to get one Social Security credit. You must earn and pay taxes on $4,640 to receive the maximum four credits in one year.3 You must have at least 40 credits in order to qualify for Social Security retirement benefits. These credits can be earned at any time during your work history and do not need to be earned consecutively. If you stopped work at any time and returned to earn the remainder of your 40 credits, you’re eligible for benefits. Benefit amounts are then calculated based on the worker’s overall wages. The Social Security Administration website offers a retirement benefits estimator to help you understand how much your benefits will be at each age.4

The best time to claim benefits

While workers are eligible to claim their benefits at age 62, doing so forfeits as much as 25% of the monthly amount a retiree may ultimately receive.5 Benefits increase even more if you wait until age 70 to receive them.6 However, postponing your claim also means that you don’t receive any payments during the years in which you deferred claiming benefits. Work with a reputable financial advisor to help you make the best decision for you, keeping these factors in mind.

Financial Needs: Retirees often need 70% to 80% of pre-retirement income to meet financial needs. Social Security replaces only about 40%.7 If you are having trouble making ends meet, claiming your benefits early might be a good solution. Doing so reduces your benefit amount, but you receive benefit payments sooner and will receive more payments during your lifetime.

However, if you prefer to maximize your monthly income, waiting to claim benefits might be the better option. According to the Social Security Administration, if you are eligible to receive a $1,000 per month benefit at full retirement age (65 to 67, depending on the year in which you were born), you will receive only $750 per month if you claim benefits at age 62. However, if you wait until age 70 to claim benefits, that monthly payment increases to $1,320.8

While that is a significant increase, delaying your claim from age 62 to age 70 means that you forego receiving $72,000 in payments that would have been made monthly during that time. It will take more than 10 years to make up that amount in increased payments. However, if you continue to earn wages after age 62, Social Security income may not be needed and may increase your tax liability, as described below. Other factors, including inflation, the time value of money, and your effective tax rates, can affect your decision on when to claim.

To help you understand how much income you’re going to need in retirement, consult your financial advisor. You may also find TIAA-CREF’s Retirement Goal Evaluator useful.

Personal Factors: Your individual circumstances will have an impact on the best time to claim benefits, as well. For example, thinking about health and longevity isn’t always pleasant, but it’s an important piece of the retirement puzzle. While no one can predict the future, those who have a family history of long life spans and are in relatively good health may need to fund a longer retirement than those who have serious health issues. In the latter case, claiming retirement benefits early may make the most financial sense.

In addition, your marital status may affect your decision. Spouses are entitled to either the individual benefit they earned or a spousal benefit of up to one half of the other’s benefit amount. It’s important to determine which is higher and take advantage of the best possible benefit for your situation. Upon the death of your spouse, you will continue to receive the larger of your benefit, or your late spouse’s, but not both. Divorced people who were married for at least 10 years and are not currently remarried may be eligible for benefits based on their ex-spouse’s record.9

Other factors that may affect your total benefits and the decision on when to claim include past federal, state or local government work and military service. For more information see the Social Security Administration’s information on factors that may affect your benefits .

Employment and Tax Status: References to “retirement” around Social Security don’t mean you have to stop working. You can remain employed and still receive your benefit. However, if you continue working in your 60s and possibly 70s or later, various income and tax factors will affect your decision about claiming benefits. If you are younger than full retirement age and elect to receive benefits while working, your benefit may be reduced until you reach full retirement age.10 The calculations of how much your benefit will be reduced are based on your age and how much you earn over the allowed amount. The Social Security Administration publishes a good overview of this complex calculation here .

In some cases, money you receive from earned income and other retirement income can increase the tax obligation on your benefits. In 2012, your Social Security benefit may be taxed if you are married with a combined household income of more than $32,000 or if you are single or widowed and earn more than $25,000, IRS Publication 915 “Social Security and Equivalent Railroad Retirement Benefits” explains the thresholds and calculations.

Depending on your income, as much as 85% of your Social Security benefit may be taxable. State taxes on benefits vary and must also be considered. Combined income from Social Security benefits and earned income may also affect your total tax liability, pushing you into a higher tax bracket and increasing the taxes on both wages and benefits amounts.

Determining the best time to claim your benefits is a process that should include rigorous analysis of your future needs, current financial factors, and retirement plans. The best time to claim is likely different for each individual — what works best for a neighbor or family member might not be the best decision for you. The Social Security Administration’s website is filled with information and provides a good place to start. However, consult with a reputable financial and tax advisors to determine the best strategy for you.