I am 60 years old and trying to decide when to start receiving Social Security benefits. What are my options? If I continue to work for a few more years, how will this affect the payments I will receive from Social Security?
A. Basically, you have three options: early retirement, full retirement at age 66, or late retirement. If you choose to retire early, you will be able to collect Social Security benefits at age 62. With full retirement, you will have to wait until your 66th birthday. Late retirement means you will defer benefits until age 70.
Each of these options involves a different calculation of the amount you will charge monthly. You can retire at any time between ages 62 and 70, and your benefits will be prorated to reflect your age.
If you elect early retirement, your monthly benefit will be permanently reduced. Why? Because you will receive more checks for a longer period than someone who delays their benefits until age 66 or 70.
Let’s say, for example, the monthly payment you expect to receive is $1,000, at age 66, normal retirement age. If you retire at 62, you would get a reduced benefit of $750. But, if you wait until age 70, you’d get $1,320 — that’s a 32% increase over the amount you’d get at age 66.
The “Benefits Based on Age” chart shown here illustrates how your monthly payment is linked to the age at which you start receiving them.
Before making a decision, there are two other monetary factors worth considering.
The Social Security earnings limit
If you plan to start collecting your benefits and continue working, keep in mind that in 2011, you are allowed to earn only up to $14,160 before you reach the earnings limit. For every $2 you earn over $14,160, Social Security will withhold $1 in benefits.
The earnings limits disappear the month you turn 66, and the withheld money will come back to you eventually. When you reach full retirement age, Social Security will review your earnings record and increase your benefit to make up for any months in which you were not paid your full benefit because you were working.
But in the short term, if you make much more than $14,160 a year, you won’t see much of your Social Security benefits until you’re 66. In that case, it would be wise to wait until age 66 to start receiving benefits.
Taxes on Social Security benefits
Social Security benefits are subject to federal income taxes, so the earlier you start drawing them, the sooner you start paying higher income taxes.
Tax charges on benefits are tied to “combined income,” which the Internal Revenue Service (IRS) defines as the amount of your adjusted gross income, plus nontaxable interest, plus half your Social Security benefits.
Singles with a combined income of $25,000 to $34,000, and couples with a combined income of $32,000 to $44,000, may have to pay taxes on 50% of Social Security benefits.
If a single person’s combined income rises above $34,000, or a couple’s rises above $44,000, up to 85% of Social Security benefits may be subject to income tax.
Social Security’s website is a valuable source of information about retirement benefits. For more information on tax matters, contact the IRS (Internal Revenue Service) at 1-800-829-3676. Request Publication 554, “Tax Guide for Seniors,” and Publication 915, “Social Security and Equivalent Railroad Retirement Benefits.”
Stan Hinden has been a long-time writer on financial topics and is the author of How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire.
Full retirement age is the age at which you are entitled to receive 100% of your Social Security benefits, which are calculated by your lifetime earnings. It is gradually increasing, from 66 years and 4 months for people born in 1956 to 66 years and 6 months for those born in 1957, all the way to 67 for those born after 1960.
Those dates apply to retirement benefits you earned while working and to spousal benefits, which your husband or wife may collect based on your work history. They are a bit different than survivor benefits, which you can claim if your spouse dies. The full retirement age for survivors is 66 for those born in 1956, gradually increasing to 67 for those born after 1962.
Note that
- Applying for benefits before you reach full retirement age will lower your monthly payments. The earlier you apply (you can start receiving them at age 62 ), the more your benefits will be reduced. Spousal and survivor benefits are also reduced if you apply before you reach full retirement age.
- You can increase your retirement benefits if you apply after the full retirement age. Each month that you postpone requesting them, up to age 70, you accumulate credits for delayed retirement that increase your future benefits.
