When to Collect Social Security: Why You Should Wait

Few retirement issues are as complex and controversial as Social Security and the strategies people can use to maximize their benefits.

So we were not surprised that an article The New York Times published in June on how women can make the most of Social Security generated many reader questions — some heated. It also provoked a pushback from some readers who disagreed with experts’ advice that individuals should wait as long as possible to claim benefits.

Likely to add to the debate is a recent announcement that Social Security is expected to be insolvent a year than earlier than previously projected. Congress is likely to step in, many experts say, and moves that beneficiaries make now to maximize their benefits will help no matter what happens.

We are back to address several of your questions. First, keep the Social Security basics in mind:

• You are entitled to a full benefit at full retirement age, which is 66 for someone born between 1943 and 1954. The full retirement age gradually rises to 67 for those born in 1960 or later.

• You can claim as early as 62, but the benefit will be reduced permanently by a certain percentage for each month a beneficiary claims before full retirement age. The benefit rises 8 percent for each year a beneficiary delays claiming between full retirement age and 70.

• A lower-earning spouse can collect a “spousal benefit” that is up to 50 percent of the higher earner’s full retirement benefit. A widow or widower can collect up to 100 percent of the deceased spouse’s benefit.

Now, let’s get to your most-asked questions.

Why not claim early and invest the benefits in the markets?

This strategy is highly risky, said Elaine Floyd, the director of retirement and life planning with Horsesmouth, a New York company that trains financial advisers on Social Security strategies and other issues.

A beneficiary who goes the investment route, Ms. Floyd said, would need to reap “consistently high returns” and must be disciplined enough to sock away the money every month. And if the beneficiary is married and the higher earner dies first, the spouse would receive a relatively low survivor benefit.

Ms. Floyd offered a hypothetical beneficiary whose monthly Social Security benefit at full retirement age is $3,000. Say the beneficiary claimed a reduced benefit at 62 and invested the money, earning an inflation-adjusted return of 3 percent a year. By age 95, the cumulative benefits and investments would be roughly $278,000 lower than if the beneficiary had waited until 70 to claim the larger benefit.

“It’s really an apples-to-oranges comparison,” she said. “An 8 percent retirement credit and lifetime income from Social Security are the law, but investment returns are not that predictable.”

Why not claim early, rather than draw down an I.R.A. and other savings?

It’s conventional wisdom to delay tapping an individual retirement account, instead enabling it to grow tax deferred. Roughly 40 percent of beneficiaries claim reduced Social Security benefits at 62 or 63.

But many researchers say reversing the order — living on retirement savings in the early years and holding off on collecting benefits — is likely to increase monthly income over a lifetime.

One reason, experts say, is the roughly 77 percent boost in benefits a beneficiary receives by claiming at 70 rather than at 62.

Another is the difference in how I.R.A. withdrawals and Social Security benefits are taxed. Individuals pay the ordinary federal income tax rate on all I.R.A. withdrawals. But just 85 percent, 50 percent or none of their Social Security benefits are taxed.

The amount subject to tax depends on your “provisional income,” which includes half of benefits and 100 percent of nonbenefit income. The more I.R.A. income, the more likely you are to pay at a higher marginal rate and be taxed at the 85 percent threshold.

With this formula in mind, a new retiree should start I.R.A. withdrawals early, when the marginal rate is likely lower, said Laurence Kotlikoff, an economics professor at Boston University.

By the time the beneficiary is 70 and starts claiming enhanced Social Security benefits, her I.R.A. withdrawals will be smaller because she drew down her assets for eight years, Dr. Kotlikoff said.

“Many if not most people should take I.R.A. withdrawals earlier than planned to stay out of a high tax bracket later and have less of their Social Security benefits hit by taxes,” said Dr. Kotlikoff, who created an online financial planning tool for individuals and financial planners.

Consider a person who is due a $2,200 monthly Social Security benefit at full retirement age. Her $500,000 I.R.A. and $200,000 in other savings are expected to grow at an inflation-adjusted 2 percent a year.

Say she claims her benefit at 62 and waits until 72 to take her I.R.A. required minimum distributions. If she lives to 100, she would generate roughly $900,000 in discretionary income after paying for housing and other expenses, according to Dr. Kotlikoff’s calculations. The income would come from benefits, I.R.A. earnings and retirement savings.

She would do better by drawing down her I.R.A. at 62 and starting benefits at 70. Because of a lower tax bite and higher benefits, “She would pocket, at no risk, an extra $163,000,” Dr. Kotlikoff said.

Will my Social Security benefits be reduced if I work?

A worker who claims benefits before full retirement age may run into the “earnings limit,” in which Social Security temporarily withholds $1 in benefits for every $2 in earnings above a certain amount — in 2021, the limit is $18,960.

And though a person may need benefits to supplement low earnings, the downside of permanently reduced benefits also exists if you claim early, whether or not you exceed the earnings limit, Ms. Floyd said.

A working widow who collects a survivor benefit could also face the earnings limit. A widow can claim a survivor benefit as young as 60, though her benefit will be reduced by claiming before full retirement age. If she is working and exceeds the earnings limit, part of those reduced benefits will be withheld.

The earnings limit also applies to the spousal benefit claimed by a nonworking spouse if the other spouse is working and both are younger than full retirement age. Social Security withholds benefits on total household earnings that exceed the limit.

Withheld benefits are not lost forever, however. At the beneficiary’s full retirement age, Social Security will adjust the monthly benefit upward to account for the withheld benefits. The beneficiary will continue to receive the higher payment even after she recoups the withheld benefits, which could take 12 years.

This is how it works: Say a person is eligible for a benefit of $24,000 a year at full retirement age but claims at 62 and gets a reduced benefit of $16,800. If the beneficiary earns $25,000, the government will withhold $3,020 for the year, which is half of the earnings above the limit. At full retirement age, the beneficiary will continue to receive the reduced benefit of $16,800 but eventually will get the withheld money back in the former of a higher benefit.

James Blair, the lead consultant with Premier Social Security Consulting in Cincinnati, said he advises working clients to balance the Social Security income they will receive by claiming early with the permanent reduction in benefits.

“If Social Security is withholding two or three checks, they will get paid for the majority of the year,” said Mr. Blair, a former Social Security administrator. “If they’re only getting two or three checks, it usually is better to wait to claim.”

Can a person who is due a public pension also collect Social Security benefits?

Two rules could reduce benefits for people who are also entitled to a public pension on earnings not covered by Social Security.

One rule is the “windfall elimination provision” (known as the W.E.P.), which applies to people who worked at jobs covered by Social Security but also worked as noncovered government employees and are due a pension.

When it is time to claim benefits, many people are unprepared for these cuts, Mr. Blair said. Possible W.E.P.-related reductions are not reflected in the worker’s Social Security statement, which shows the history of annual earnings and estimates of future benefits only for jobs covered by Social Security.

“You can have someone who looks at the Social Security statement and it shows a benefit of $1,000 at full retirement age,” Mr. Blair said. But the individual — a teacher who is due a public pension, for example — may be surprised later if the benefit is much lower, he said.

In addition to W.E.P. reductions, a government pensioner who applies for a Social Security spousal or survivor benefit can face reductions. The “government pension offset” (G.P.O.) reduces those benefits by two-thirds of the government pension.

For example, widows and widowers are typically entitled to a survivor benefit that is 100 percent of their late spouse’s benefit. But if a widow is receiving a monthly government pension of $2,000 and her late husband’s Social Security benefit was $1,500, her survivor benefit would be reduced by $1,333 and she would collect just $166, according to the Social Security Administration.

Mr. Blair said individuals who are eligible for a public pension and Social Security can estimate their future benefits by running the numbers on the W.E.P. and G.P.O. calculators.

Pensioners are exempt from the W.E.P. offset if they paid into Social Security for 30 years or more in jobs with “substantial earnings” ($26,550 in 2021).

Older people who fall short of the 30 years could eliminate or reduce the W.E.P. impact by working more years at the substantial earnings level, even if they already started collecting benefits, Mr. Blair said.

Can a divorced woman who was married for more than 10 years claim a spousal benefit on her ex-husband’s work record and then switch to her own retirement benefit?

Not any longer. The government eliminated a strategy that allowed a spouse or a divorced spouse to use a “restricted application” to file for a spousal benefit while letting her own retirement benefit grow. Now only people born before 1954 can do this.

Instead, when a spouse or divorced spouse files for benefits, the government will give her all the benefits she is eligible for — whether it is her retirement benefit or a spousal benefit, said William Reichenstein, a principal of Social Security Solutions, a company that helps individuals maximize their lifetime income.

A divorced spouse can file for a spousal benefit even if the ex-spouse has not yet claimed a benefit as long as both are at least 62 and are divorced for more than two years. A married spouse must wait until her spouse has filed.

But if the ex-spouse dies, the picture changes. The surviving ex-spouse can claim a survivor benefit as early as 60 and allow her retirement benefit to grow until as late as 70. Or she can claim her reduced retirement benefit early and then switch to a higher survivor benefit at full retirement age.

“If you were married for 10 years, keep tabs on the ex,” Ms. Floyd said. “Once he dies, that survivor benefit could be higher than your own.”