Social Security – Decisions, Decisions

You can start Social Security retirement benefits at any age between 62 and 70, with the amount of your monthly benefit increasing the longer you wait within that window. That structure means that the average recipient would receive around the same amount over his or her lifetime no matter when that person started collecting. Of course, no individual is truly average, which makes the decision one based on personal factors that vary from person to person. These six key factors should weigh in anyone’s decision on when to start your benefit.

1. Am I still working?

Assuming you’re still working somewhere you enjoy when  you approach Social Security eligibility, consider waiting until at least until full retirement age -- and likely until age 70. Social Security levels a substantial penalty for collecting before full retirement age while still working. That penalty is as much as $1 for every $2 earned above $17,040 in a year. That makes it largely impractical to collect early if you still expect a decent paycheck.

Assuming you’re still drawing a paycheck, when within that window between 67 and 70 to start collecting will depend in part on how large that paycheck is. If the paycheck is still enough on its own to cover everyday living expenses, it makes sense to wait until 70 to start your payments. If you’re supplementing costs by tapping into your portfolio, then start collecting closer to 67.

2. Am I disabled?

If you stop working early because you’re become disabled, you will likely already be receiving Social Security Disability Income. That benefit converts to standard Social Security retirement benefits at your full retirement age.

Despite the fact that you may be in good health today, the unfortunate reality is that disability rates increase with age. While you are not expecting to become disabled, it is comforting to know that the Social Security decision will already have been made for you, making it one less thing to worry about.

3. Am I still making Roth IRA conversions?

Nowadays most retirement nest eggs have been built inside employer's traditional 401(k) plans. Those plans are wonderful during a person's accumulation years, but mandatory distributions from them can substantially raise a person's overall costs during retirement. If you happen to leave the workforce early, one thing to consider is taking advantage of lower tax rates to convert some of that money from traditional retirement accounts to a Roth IRA.

To make those Roth conversions worthwhile, a person should come up with the money to pay the related taxes from a source other than the money being converted. Taking Social Security early would provide you with a source of funding to pay those taxes without having to deplete as much of whatever money you may have in after-tax accounts. Thus, if you are still performing Roth IRA conversions, it may make sense to take Social Security closer to age 62.

4. Can I qualify for an Obamacare subsidy?

Obamacare subsidies for health insurance are based on a household's income. Retirees -- particularly those who haven't started taking Social Security yet -- tend to have far more control over the amount and timing of their income than those drawing a paycheck. If you can keep income low enough to qualify for an Obamacare subsidy, it would lower costs of living in early retirement.

Social Security income is included in the income considered when calculating those subsidy levels. If household income is below the level where you would qualify to have out-of-pocket costs limited based on Obamacare's thresholds, it would likely make sense to keep your income down. That would argue for not taking Social Security before age 65, the age at which you'd become Medicare eligible and would no longer have to worry about that particular income test.

5. How's my physical health?

If your physical health remains strong into your 60s, consider holding off on Social Security until closer to age 70. If cancer, blood pressure, diabetes, or cholesterol -- or other such scourges -- start becoming problems, strongly consider taking benefits closer to age 62.

Your Social Security benefits generally last until you pass, although your spouse and minor children could get some survivor benefits based on your benefit levels. The crossover point where it pays to wait generally happens somewhere between ages 78 and 81. If in your 60s you anticipate still being spry and relatively healthy in your 80s, consider waiting. If not, you might as well take the money earlier, while you can still make use of it.

6. How's my mental health?

It might seem counterintuitive, but the less confident you are in your ability to manage your household finances, the longer you should wait to collect Social Security. This is because Social Security benefits increase with age up until age 70, and provide fairly reliable, inflation-adjusted income. Therefore, the longer you wait, the higher that reliable, virtually guaranteed income will be and the less you will have to rely on others' financial prowess to enable you to cover household costs.

On the flip side, if you remain confident in your ability to manage your money effectively, the earlier you may want to collect Social Security. Because Social Security offers a reliable, virtually guaranteed income stream, the earlier you start collecting it, the less you need to rely on your portfolio to cover immediate costs of living. Collecting earlier means you can let more of your investment portfolio ride in growth-oriented investments for a longer period of time, potentially improving your overall financial position.

What about the Trust Funds?

What about those not eligible to collect any Social Security retirement benefits before the program's Trust Funds are expected to empty around 2034? Expect that any patches or adjustments that will take place to extend the financing available to Social Security will have occurred before you can do anything about it.

Instead of fretting about those fixes, you have a choice to make: you can either forgo factoring Social Security into your retirement planning (the more conservative approach), or if you still want to factor it in, you should plan for expected benefits to be cut by around 25% from what Social Security statements indicate they would be if the program remained solvent.

Social Security's Trustees indicate that the program will be able to pay between 73% and 77% of expected benefits once the Trust Funds empty. So for those starting Social Security past 2034, counting on only around 75% of what you'd otherwise be able to expect seems like a reasonable approach to take until we have better information.

Decisions, decisions

On average, the overall Social Security benefits a person receives will be about the same no matter when he or she starts collecting. Still, what might be the absolute best call for one person could be a mistake for another. When it's time to ask yourself the question of when to claim your own Social Security, consider these six factors along with others that may matter to you. Whatever age you choose to start collecting, know that if you consider those important to you, you'll likely make a reasonable choice.