Are you thinking about filing for social security? Five factors to consider

Ryan Christine Coulson

November 19, 2020

Are you thinking about filing for social security? As you begin your analysis, there are five factors to take into consideration to help you make this important decision.

This is the fourth and final blog in a four-part series that focuses on retirement planning.
Part 1: Starting to plan for retirement? Four questions to ask—at any age
Part 2: Converting your traditional IRA to a Roth IRA? Three considerations when converting to a Roth IRA
Part 3: Three types of equity incentive compensation to understand

Determining when to begin claiming Social Security benefits depends on each person’s individual circumstances. Your decision should be coordinated carefully with your overall retirement income plan so that you make the best decision for your personal situation. As you begin your analysis, there are five factors to take into consideration to help you make this important decision.

1) Full retirement age

Full retirement age (FRA) is also called “normal retirement age.” It is the age at which a person first becomes eligible to receive full, or unreduced, retirement benefits.

For people born in 1937 or earlier, FRA is 65. Beginning with people born in 1938, FRA gradually increases until it reaches age 67 for people born after 1959. If your FRA is greater than 65, you can still take benefits at age 62, but the reduction to your benefit will be greater than it will be for those who were born before 1938.

For example, if your FRA is 67 and you start taking your retirement benefits at age 62, your monthly benefit amount will be reduced by about 30%. For every year that you delay starting your retirement benefits up until your FRA, the reduction to your monthly benefit becomes progressively smaller and you’ll receive a greater percentage of your
maximum benefit.

2) Delaying your benefits

If you don’t want to begin receiving benefits at your FRA, you can delay them—which could result in a larger monthly benefit. With delayed retirement credits, you’ll be eligible for your largest monthly benefit if you retire at age 70. You can compute the effect of delayed or early retirement by using a calculator on the Social Security website.

3) Working and receiving benefits

If you take benefits while you are working, your earnings will reduce your benefit amount until you reach your FRA. After you reach FRA, your benefit amount is recalculated to leave out the months when benefits were reduced as a result of your excess earnings. This could result in higher monthly payments in the future.

4) Income taxation

Keep in mind that benefits may be taxable. Generally, if Social Security benefits are your only source of income, those benefits are not taxable. However, if you receive income from other sources, your benefits may be taxable if your modified adjusted gross income exceeds the base amount for your filing status.

5) Personal circumstances

A variety of personal circumstances can come into play when you are deciding whether to take a lower benefit sooner or a higher benefit later.

  • Life expectancy – If you are in good health with a long-life expectancy, delaying the start of your Social Security benefits could increase the monthly amount you receive later in life.
  • Health – Conversely, if you are in poor health and/or are unable to work, you may want to start taking benefits early to help meet living expenses and/or medical costs.
  • Other income – If you are able and willing to work beyond age 62 and have other sources of income that can meet your cash flow needs, waiting until your FRA to receive benefits probably makes sense.
  • Marital status – In general, spouses are eligible to receive the greater of their own Social Security benefits or one-half of their spouse’s benefit. If the higher earning spouse starts collecting Social Security prior to reaching FRA, the resulting reduction in benefits could reduce the total amount the couple receives.

There are many nuances to claiming Social Security, which is why it is important to review your situation with your advisors. For more information about Social Security, visit our The Financial Side of Retirement Planning resource page.

Ryan Christine Coulson is a senior wealth strategist representing CIBC Private Wealth Management in San Francisco and Newport Beach, with 14 years of industry experience.