When Should an Individual Start Their Social Security Retirement Income?

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

Taking it early means cash flow now while delaying can provide you with higher future income benefits.  For an individual with no dependents the decision is less cumbersome than it is for a couple but still there are a number of factors to consider.

Generally, the three main factors one needs to consider when deciding when to take Social Security benefits are their life expectancy, what any investments they have will earn, and what the anticipated inflation rate might be.

The inflation rate is important because Social Security has an inflation protection aspect that allows any delayed benefits to increase, along with their base benefit.  Using this cost of living adjustment is a powerful way to hedge against outliving your money.

Someone who is in great health and expecting a long life and/or expects their investment portfolio to under perform and/or believes inflation will be relatively high would consider taking their benefits as late as age 70 which is the longest one can wait to receive the most additional credit.

On the other hand, someone who is in poor health and/or expects their investments to perform well and/or believes inflation will be relatively low would consider taking their benefits early.

To better understand these factors you can review my presentation on break-even analysis.

In addition, Individuals who plan to continue working while receiving benefits BEFORE they reach full retirement age may want to consider the impact that the earnings test has on their benefit.

This ‘test’ could force the loss of up to $1 of cash benefit for every $2 they make – if they exceed the income limit imposed by the administration.

In the year that an individual reached full retirement age it is a bit better as they lose $1 for every $3 earned over that limit.

There are two ways that the Social Security Administration can take this money from you for earning more than the limits they set.  First, if you know you are going to be over the monthly limit you can call Social Security and tell them. 

With this information they will withhold the money based on your estimate. If you make less, they give that money back the following year.

You do not need to be proactive and inform them because they will know if your income is over their threshold.  They find out when your job pays the social security taxes on your wages. 

If you choose to let them find out for themselves, they will take back everything you owe (the $1 for every $2 penalty) in $1,000 increments.

For example, if you made $2,002 over the limit, you might think that would have to pay back $1,001 ($1 for $2) but they would actually round up the $1,000 increments and take $2,000 back that next year.

Now you might be thinking “It’s unbelievable that they would take benefits away from someone that wants to work!” but it isn’t if you understand why they do it.

This money that gets taken back by the Social Security Administration actually gets credited back to your account for when you do reach your full retirement age. 

In the example where the person lost $2,000 in benefits for making to much, if their monthly check was $1,000 a month, then that $2,000 withheld will actually credit the social security recipient with 2 months delay in applying – as if they never started these benefits in the first place.

In essence, Social Security earnings test is a form of forced delay.  It would be unfair if they kept benefits from someone trying to work.

Although the decision on when to start social security is simpler for a single no-dependent individual, there are still some factors to consider. 

Put the numbers together, understand your options as it relates to your overall financial picture and pick the option you are most confident with.

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