When to begin collecting Social Security Benefits? The answer is not as straightforward as you may perceive
When I work with clients on building their retirement income plan, the question that often comes up first is ‘When should I collect my Social Security benefits? Typically, I will give my favorite answer – it depends😊. In all seriousness, this decision truly does depend on the income need during one retirement years. For example, let’s say a client has a health amount of guaranteed income via a pension, they may not need additional income from Social Security or their investment portfolio. On the flip side, a client’s investment portfolio may be their sole source of income (aside from Social Security), so it could make sense to turn on the Social Security benefit to reduce the distribution amount from the portfolio.
Let’s take a step back and recap. In general, the earliest age you can begin to collect your Social Security benefit is at age 62. After you reach age 62 you can begin to collect at any age. If you have created a profile on SSA.gov or if you have made an appointment to sit with the local Social Security office, they should be able to provide you with a summary of your benefits at each age. I typically see clients expecting to collect at age 62, age 65, their designated Full Retirement Age (FRA), or age 70. For those born between 1955-1959 your FRA ranges from 66 2 months – 66 and 10 months. If you were born after 1960, your FRA is age 67. If you collect your benefit prior to your FRA, you will receive a reduced benefit. If you wait to collect until age 70, you will receive an 8% increase on your benefit per year from 67 to 70.
One reason I see people wait to collect until their FRA is if they plan to work part-time when they retire. As there are earned income limits if you collect Social Security prior to your FRA. In 2024, this figure is $22,320/year. For example, let’s say I retire at age 62 from Corporate America and I plan to collect my Social Security benefit ASAP. But then I see an opening at a local hardware store, and I believe it may be beneficial to maintain some level of social interaction a few times a week. I need to make sure that I do not earn more than $22,320/year, otherwise for every $2 over this amount that I earn, Social Security will withhold $1 of benefits. Once you reach FRA, you can generally earn as much income as you like.
*As a note, earned income does not include pension income or distributions from your pre-tax retirement accounts.
In terms of taxes, up to 85% of one’s Social Security benefits can be taxable. If you are a single tax filer and your income is above $34,000 you can expect to pay taxes on up to 85% of your benefits. For joint filers, if your combined income is over $44,000 you can expect to pay taxes on 85% of your benefits. Always consult with your tax advisor.
Furthermore, when we are running projections for a client’s retirement income plan, we factor in the timing of Social Security by first making assumptions on the following:
- Ultimate retirement age?
- Will part-time income be earned?
- How much income is needed to support the desired lifestyle?
- Trade-offs between turning on Social Security and taking withdrawals from retirement accounts?
- Are we considering ROTH conversions?
Once we narrow down the retirement age, plans for part-time income, we need to determine how much income is needed to support the desired lifestyle. This then leads into where this income needs to come from.
Below is a good example:
- Retired at age 65, FRA is age 67
- No part-time income
- Planned living expenses of $70,000/year (assumed inflation & taxes)
- Social Security benefits at age 65 & 67
- 65 = $32,000/year ($2,666/month)
- 67 = $36,000/year ($3,000/month)
If we decide to turn on this benefit at age 65 the client will receive $32,000 and then will need to raise $38,000 of income from another source – cash, investment portfolio, etc. If the client waits, then the entire $70,000 will need to be withdrawn from the portfolio and the client will receive $36,000/year upon reaching FRA.
In my opinion, when we run the analysis, it is important to understand the impact two full years of $70,000 withdrawals could have the one’s portfolio. Of course, this does depend on the asset level, but for this example I will continue on the conceptual side of things. Furthermore, I typically find that if there is not a good reason to delay collecting, turning on the benefit at age 65 in this example will create less of a stress on the portfolio (especially if there is a down market that year), which in turns allows it to continue to grow and potentially last longer to provide additional supplemental income down the line, or to leave a large legacy to beneficiaries.
A few things to keep in mind here is that the income need from the portfolio should be set aside in something safe at least 1-2 years in advance – this allows for smoother distributions especially if the market is not having a good year. This hopefully avoid selling positions while they are down in value, and in an up market allows the portfolio to continue to grow. The second aspect here is a client’s tax bracket once Social Security is turned on and pre-tax distributions are being taken. You want to make sure you understand what marginal bracket you are in, and how taking additional distributions could bump you up a tax marginal tax bracket. Knowing this could cause you to take the amount needed (in addition to Social Security) from cash or a taxable investment account to avoid bumping up a bracket. Always consult with your tax advisor.
To close out this article, the other reason I typically see folks delay Social Security is to perform ROTH conversions or to withdraw pre-tax funds in a lower marginal bracket than when they made these contributions. As I covered in a previous post, a ROTH conversion is when you withdraw money from your pre-tax retirement account, pay the tax, deposit the conversion into a ROTH IRA. The conversion and earnings will come out all tax-free after 5 years have passed.
In this instance, let’s say I contributed the majority of my pre-tax 401k contributions while I was in the 24% marginal bracket. I am now retired at age 65 and have a choice of turning on Social Security or taking withdrawals from my pre-tax account for income purposes or for ROTH conversions. I also know that at my Required Minimum Distribution Age (using 75 in this example), I am going to need to withdraw an amount that will put me back into the 24% marginal bracket. Let’s say I have a good amount of cash in the bank, and I am married.
So, I could elect to delay collecting Social Security and withdraw just enough pre-tax distributions to keep me in the 12% marginal bracket – the top of this bracket is $94,300 of taxable income in 2024. I will use the distributions to fund my lifestyle. In this case I can withdraw up to $123,400 from my pre-tax account, take the standard deduction for joint filers of $32,300 (additional standard deduction of $1,550 per spouse for being over age 65 + $29,200 standard deduction) and end up with taxable income of $94,300. This keeps me in the 12% marginal bracket, and allows me the ability to withdraw this money in a lower bracket than I contributed in. Always consult with your tax advisor.
Furthermore, by following the same strategy above I can complete ROTH conversions and have this amount be deposited into the ROTH IRA – assuming I pay the taxes with cash on the sidelines – and have the conversion plus earnings be withdrawn tax free after 5 years. As noted above, this could be a way for a client to reduce their projected Required Minimum Distribution (RMD) amount and also pull this money out at a lower tax bracket compared to the projected bracket at their RMD age.
In both of these scenarios, if I decided to turn on my Social Security benefits, I may have bumped my income up to a level where it did not mathematically make sense for me to take advantage of these for tax purposes.
To conclude, in my experience understanding what goes into the timing of Social Security and ultimately making the decision is a lot more than running a random online calculator that simply shows you the benefits you could collect over your lifetime. As you can tell from the above it is quite complex, and it is vital to factor in the income needed to support your lifestyle, an understanding of your current plus future tax situation, and how your investments are positioned. The Social Security decision is different for everybody depending on the variables mentioned above, and of course one’s health. All the variables mentioned above could be set aside if one is in poor health and hopes to collect as much benefit as possible in the time they have left.
If you found this helpful or if you have additional questions regarding timing of Social Security benefits, please feel free to connect with me through the contact info below.
Thanks for reading!
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give tax or legal advice.