Many retirees assume that applying for Social Security benefits immediately makes sense to them. But the reality is that it’s not always a good idea to start receiving these payments as soon as you leave the workforce.
To decide if depositing Social Security checks is the right choice for you, there are three crucial questions you need to ask yourself. Here is what they are.
1. Will claiming reduce your benefits?
If you are considering applying for Social Security, you will first want to understand if your decision could end up reducing the monthly income you receive.
This is a possibility because you only receive your standard monthly Social Security benefit if you receive your first check at an age designated as your full retirement age. FRA is based on your date of birth and ranges between 66 and four months, and 67. If you start paying at exactly this age, you will get your Principal Insurance Amount (PIA), which is based on average earnings of your career. If you wait beyond FRA, your PIA will increase, and if you start earlier, it will decrease.
You can calculate how your standard benefit will change based on your claim age by determining your FRA and then applying the following penalties or credits to your primary insurance amount:
- Reduce your payment by five-ninths of 1% for each of the first 36 months you claim benefits before your FRA.
- Reduce your payment by an additional five twelfths of 1% per month if you request more than 36 months in advance.
- Add two-thirds of 1% to your standard benefit for each month you delay claiming benefits beyond FRA.
If this formula is confusing, you can also log into your Social Security account online where you can find benefit estimates at different application ages. It’s important to know that applying early will permanently reduce benefits, so make sure you’re ok with this choice before you start benefit checks.
2. Can you afford to defer your claim?
If you’re committing to retirement soon, you also need to think about what your budget would look like without Social Security checks. You need to maintain a safe withdrawal rate and not take too much money out of your savings too quickly, so consider how much income your retirement investments will actually provide.
If that’s not enough without Social Security checks, you may have to apply for benefits even if you’d rather not do so right away. Starting Social Security earlier than planned may be better than draining your nest egg dry and ending up relying only on your retirement benefits if they’re just not enough to live on on their own.
3. Are you going to work?
Finally, you will need to determine whether you are going to work in retirement or not. If so, you need to learn the work rules while getting Social Security checks.
If you work while receiving benefits and have not reached full retirement age, you may find yourself temporarily deprived of some of your benefits once your earnings exceed a certain threshold. It makes no sense to start checks only to stop receiving them due to high income.
By asking yourself these three questions, you can decide whether it makes sense to go ahead with applying for Social Security benefits or if it would be better to put off applying for benefits a little longer. Remember that you can retire without Social Security, but you should only do so if you can comfortably afford it without depleting your savings too quickly.