Deciding when to take Social Security benefits

Many current retirees decided to begin taking Social Security retirement benefits well before their full retirement age—the age at which a beneficiary is entitled to receive a full Social Security retirement benefit based on her lifetime earnings record.

In some cases, need drove the decision to take early benefits; in others, fear about the long-term viability of the program. In many cases, the decision came down to the retiree not knowing she had the option to delay benefits.

Regardless of the reason, the consequences of taking early Social Security benefits are significant and ongoing. Assuming a full retirement age of 66 (as it is for those born between 1943 and 1954), taking retirement benefits starting at age 62 results in a permanent 25% reduction in benefits. In other words, if the full retirement age benefit—known as the primary insurance amount—was expected to be $2,000 per month, beginning benefits at age 62 reduces this to $1,500 per month. This reduction is permanent and leads to a shortfall over time because Social Security benefits are indexed for inflation. Given that retirement benefits do not end until the recipient dies, this shortfall can add up to thousands of dollars in lost income.

So what can a retiree do if she later regrets the decision to take early benefits or her circumstances change such that she no longer needs the early income? It turns out there is a way to mitigate this decision after the fact—a “reset” allowed under the Social Security rules. Let’s discuss this process in detail.

Unknown to most retirees, Social Security allows you, upon reaching full retirement age, to stop receiving benefits until sometime in the future. Under the program rules, delayed benefits after full retirement age are entitled to earn credits of 8% per year up to age 70. Beneficiaries whose full retirement age is 66 and who delay benefits until they reach age 70 can therefore receive delayed credits totaling up to 32%.

Let’s take a look at an illustrative example. Jean is a retiree who began her benefit at age 62. Her primary insurance amount is $2,000 and was reduced to $1,500 as a result of her decision to take an early benefit. Upon reaching her full retirement age of 66, Jean decides to suspend her benefit until age 70. This benefit will now earn delayed credits at a rate of 8% per year. When Jean resumes taking her benefit at age 70, it will have recovered 99% of the original primary insurance amount (0.75 x 1.32 = 0.99) and she will receive $1,980 per month, indexed for inflation. This benefit will continue for the rest of her life and enjoy inflation adjustments throughout.

It is true that Jean would have been better off had she delayed taking her benefit until age 70, thereby increasing it to $2,640 per month with delayed credits ($2,000 x 1.32 = $2,640). Still, by suspending her benefit for a while, Jean has considerably improved her situation and effectively undone most of the effects of her prior decision to take an early benefit.

This ability to suspend benefits at full retirement age represents, in effect, a “reset” opportunity for Social Security beneficiaries who later wish to at least partially undo the impact of having taken early benefits. Retirees in this situation are advised to consider taking advantage of this planning opportunity—the result could be significantly more income available to help meet spending needs throughout retirement. Indeed, all retirees would do well to manage Social Security as a form of “longevity insurance” given that this income keeps pace with inflation and lasts for a lifetime. Doing so could be one of the best financial moves they will ever make.