When should you collect Social Security?

For many elderly people, Social Security benefits make up one of their primary sources of income in retirement. For half of seniors, Social Security comprises about half of their retirement income, according to the Center on Budget and Policy Priorities. Some studies estimate that without Social Security, between 30% and 40% of senior citizens would be considered below the poverty line.

The age at which you decide to collect your Social Security benefits has a big impact on how much you'll earn from the program over time because the longer you wait, the higher your monthly payout will be.

"Don't just call Social Security and apply at age 62. Everybody has options. A married couple could receive $1 to $1.5 million in benefits over their lifetime. And single people could [receive] maybe half of that," says Marc Kiner, a CPA at Premier Social Security Consulting. "And do not assume that Social Security will review your options with you."

Select spoke to Kiner and Jim Blair, the lead consultant at Premier, about some of the factors you should consider when deciding when to apply for Social Security benefits.

First off, every eligible worker can begin receiving Social Security benefits at age 62, but you'll get a reduced monthly payment if you don't wait until you're at full retirement age. Your monthly payment will depend a few things, including your income throughout your working years, how much you paid into the Social Security system and at what age you claim benefits. Benefits are adjusted yearly based on the cost of living.

Full retirement age depends on the year you were born:

• If you were born between 1943 and 1954, full retirement age is 66
• If you were born between 1955 and 1959, full retirement age is between 66 and 67, depending on your birth year
• If you were born after 1960, full retirement age is 67

The Social Security website provides a calculator to help individuals understand how much their benefit will be reduced if they collect early. For example, if you were born in 1960 and wanted to collect as soon as you hit age 62, you'd receive 70% of your full retirement age payout. But if you waited until age 64 you'd get 80% of the full benefit.

By delaying the receipt of your benefits past full retirement age, you'll earn even more than the full benefit — for every year after full retirement age and before you hit age 70, you'll collect 8% more each year.

• If you're full retirement age is 66, you can earn up to 132% of your full benefit by waiting until you're 70 (8% * 4 yrs)
• If you're full retirement age is 67, you can earn up to 124% of your full benefit by waiting until you're 70 (8% *  3 yrs)

Whenever you wait until age 70 to collect benefits, you'll be missing out on the years you weren't receiving payments. If you're deciding when to collect, you might consider calculating your break even point. 

Your break even point tells you at what age you'll receive more in total Social Security earnings, by collecting at full retirement age or at age 70, than you would have had you collected benefits early. 

For many people, the breakeven point is around 12 and ½ years after age 70 or full retirement age, says Blair. 

For example, if you collected early at age 62 rather than delay until your full retirement age of 67, you would be earning an additional five years worth of benefits. However, if you collected at 62, your benefit would be reduced by 30%. An individual collecting at age 67 would need to survive around another 12 years after collecting benefits to 'break even' compared to getting payouts starting at age 62.

You can calculate your own break even number, but note that the number might not be accurate if you don't consider factors like the cost of living adjustment or having a spouse, divorced spouse or survivor's benefit.

Before you decide to collect Social Security based on your break even point, you should also consider how collecting early or delaying could impact the benefit your spouse receives.

Since the Social Security formula benefit is based on an individual's 35 highest earning years, women often collect less in benefits than men because of career breaks during motherhood and overall lower lifetime earnings. However, the Social Security spousal benefit erases some of the disparity in Social Security earnings between men and women. 

The spousal benefit is available to all spouses, regardless of whether the spouse has a work history or not (this also applies to same-sex couples). The spousal benefit is up to 50% of the higher earner's benefit and in order for a spouse to receive the benefit, the higher-earner must be collecting their own benefit.

The Social Security administration automatically determines whether an individual would earn more in Social Security benefits if they collected on their own work record versus their partner's work record.

For example, if the higher earner receives a $2,000 monthly benefit, the spouse is eligible to receive up to $1,000, depending on whether they choose to wait until full retirement age, says Kiner. For example, if someone collects the spousal benefit four years before full retirement age, their benefit will be 35% of the higher-earner's benefits. (Note: If the higher-earner collects their benefit at age 70, the spouse is still only able to collect 50% of the higher-earner's benefit.)

For working individuals who want to collect Social Security benefits early (before full retirement age), having income will have an impact on the amount of money you receive. There's a $19,560 income limit (for 2022,) for working individuals. This means that if you make above $19,560, $1 will be deducted from your yearly Social Security payment for every $2 you make above the annual income limit.

For example, if you make $40,000 and collect Social Security benefits at age 62, the Social Security administration will withhold $10,220 worth of annual Social Security benefits by sending you fewer checks per year. When you reach full retirement age Social Security will recalculate, and typically increase, the value of your benefit (by decreasing the reduction factor they calculated when you were working), so you can recoup some of the earnings you missed out on when you were working, according to Kiner. 

For many retirees, the income they receive from Social Security is not enough to live off of: According to AARP, the estimated average Social Security monthly benefit in 2022 is $1,657. If you haven't started saving for retirement it's essential to start early so you can take advantage of the power of compound interest (or interest you earn on interest).

If your company offers an employer-sponsored 401(k) with matching contributions, you should prioritize receiving the match because it's essentially free money.

You might also consider opening an individual retirement account, either a traditional IRA or a Roth IRA, both of which have unique tax benefits.

With a traditional IRA, individuals invest pretax income and don't pay taxes until they withdraw their earnings. With a Roth IRA individuals invest after-tax money so their withdrawals are tax-free. A Roth IRA is considered a good option for those who anticipate being in a higher income tax bracket in retirement: Rather than paying higher taxes later on, you'll pay taxes on your contributions upfront.

A Roth IRA, however, is not available to everyone. For 2022, the income limit for single-filers is $144,000 and for married couples filing jointly it's $204,000. Companies like Vanguard, Wealthfront, Betterment, and Fidelity Investments all provide traditional and Roth IRA options.

If you don't know where to start when it comes to building your retirement portfolio, Wealthfront and Betterment are robo-advisors that use algorithms to determine the right make up of investments for you. Users enter information about their financial goals, investment horizon and risk level and the algorithm will create a custom portfolio to match these needs. In order to meet your goals, robo-advisors automatically rebalance your portfolio over time by buying and selling assets.

It's important to understand how collecting at different ages can influence how much money you'll receive from Social Security. You should consider how collecting early or delaying your benefits impacts how much your spouse receives too.

There are plenty of different factors you need to account for when determining when to collect your benefits, but doing so could mean earning thousands of more dollars.

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