Decide when to start receiving Social security benefits is a big decision. The full retirement age is currently 67, but you can start collecting benefits at age 62. the biggest increase in income in 40 years coming up for 2023, you might be wondering when you should start collecting payments.
There are advantages and disadvantages to both early retirement and waiting a few more years. The best place to start your decision is by looking at your current financial situation, including any other money you’ve saved over the years through your 401(k), IRA or other retirement investments to determine what is best for you.
We spoke to an expert and took advice from the Social Security Administration to explain how to determine the best time to receive your benefits. For more information about Social Security, learn how you can pause payments to get more later or how to get a a new social security card.
How is Social Security calculated?
The Social Security Administration uses your average monthly earnings of up to 35 years of service to calculate your “basic sum insured,” or the benefit you would receive at full retirement age. This calculation includes income up to “taxable maximum” amountwhich is $147,000 for 2022.
After determining the number of years worked, social security selects the years with the highest earnings, taking inflation into account, takes the sum of those earnings and then divides it by the total number of months worked in those years. The resulting average is then rounded down to the next lower dollar amount.
Yours earnings are then indexed so that future benefits are reflected in the current standard of living to compensate inflation. The ‘average indexed monthly earnings’ number is then used to calculate your monthly benefit. The maximum social security benefit for a person of full retirement age in 2022 is $3,345.
If you are a husband or ex husband someone who has contributed to Social Security through taxes, you may be able to claim some of their benefits. You can choose to receive this share or payout based on your own work history, whichever amount is greater.
The Social Security Administration provides calculators to assess your future benefits. Create a My Social Security account online is a great way to see your current income or expected payouts for when you plan to retire.
When should you start collecting Social Security?
The earliest you can start receiving your Social Security benefits is at age 62 — although you’ll get a smaller amount than if you wait. If you wait until full retirement age (67 or later for those born in 1960 or later), you can collect more money — but in fewer years. However, everyone’s situation is different. The The Social Security Administration says “there is no one ‘best age’ for everyone and ultimately it’s your choice.”
Catherine Tierney, Senior Retirement Strategist for a client needs research at a financial services firm Edward Jonessuggests asking yourself the following questions: When do you want to retire and when you can I can afford it to retire?
Judging when you can afford to retire depends on the lifestyle you want as well as where you’ll live when you retire, Tierney said. It also depends on how much you’ve saved for retirement and how much you’ve contributed to your 401(k). You should also consider whether you will have other forms of income in retirement, such as a part-time job or a pension. Your health and life expectancy are also other factors to consider.
Should you wait until you’re older to get a bigger payout? Or retire early with less profit?
Deciding whether to retire early and claim your benefits early or wait a few more years may be a concern if you’re close to retirement age.
“Social Security can act as insurance against living longer than you expect, and it provides some inflation protection as your benefit adjusts for cost-of-living increases,” Tierney said. “The longer you or your spouse expect to live, the more it may make sense to wait to claim your Social Security benefit.”
But just because you’ve decided to wait to claim your benefits doesn’t mean you have to delay your retirement, she explained. However, you need to make sure you have income from your 401(k) or other investments to be able to afford living expenses if you delay claiming your benefits.
However, if you rely solely on Social Security to pay for your retirement expenses, waiting until you retire and claiming your benefits at a later date may be a better choice. You’ll receive more money each month and have more time to save for retirement.
Also, if you decide to retire early, your benefits will be decreases for each month before full retirement age. For example, if you were born in 1960 or later and you retire at age 62 with a pension benefit of $1,000 per month, your payment will be reduced to $700 (or a 30% reduction).
On the plus side, that’s still $700 that you otherwise wouldn’t have received during that time if you hadn’t withdrawn your Social Security benefits. So you may benefit from collecting payments over a longer period of time.
If you retire early, could you potentially run out of money?
Although you won’t be without Social Security (although there is a threat (that the entire pool of Social Security money could begin to dwindle), you could deplete your 401(k) or other retirement savings. However, you can help prevent this by being conservative with your withdrawal rate if you retire early, Tierney said.
She recommends regularly monitoring your expenses and your 401(k) withdrawal rate so you don’t outlive your assets. Refusal of annual cost increases or cost reductions – especially when the market is down or inflation is highas we are experiencing now – can help avoid depleting your retirement savings.
For more information, here Social Security Payment Schedule and how to view your benefits online.