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When to begin collecting Social Security retirement benefits is an important decision for those at or near retirement age. Many people begin collecting benefits as soon as they can, typically at age 62. While this may be the most common decision among retirees, it might not be the most prudent. As with many financial questions, the optimal answer depends on your specific circumstances. And there are a variety of factors that can influence the decision.

What is Full Retirement Age?

Making the optimal decision about when to start taking Social Security benefits is complicated. This is because your benefits are determined by your age relative to, what the Social Security Administration refers to as, Full Retirement Age, or FRA.

Full retirement age is not the same for everyone. But the formula is mostly straightforward:

  • For people born between 1943 and 1954, FRA is 66
  • Those born in 1960 or later, FRA is 67

For those born between 1955 and 1959 determining FRA is a little more complicated. It is age 66 plus two months for each year.

If you were born in 1955, then FRA is 66 and two months. For 1956 add four months beyond age 66. It’s six months for 1957 and eight months for 1958. If you were born in 1959, then FRA is 66 and 10 months.

But you don’t have to wait until you reach full retirement age before you can apply for Social Security benefits. Everyone is eligible at age 62. But applying for benefits before attaining FRA comes at a cost.

Why FRA Matters

Applying for Social Security prior to reaching full retirement age reduces your benefits. As an example, an individual whose FRA is 66 will receive only 75 percent of his or her full benefits when applying at age 62.

That initial 25 percent reduction sets the base for all future cost-of-living adjustments. Delaying benefits until FRA would have entitled this recipient the full benefit (i.e., no discount). Increases would continue until age 70 if he or she continued delaying benefits.

Collecting Social Security Benefits While Working

Many older Americans work past age 65. If you do, you can still collect Social Security. But this could come at a cost. Prior to reaching full retirement age, earnings over an indexed threshold will trigger a reduction in benefits. The reduction is less onerous if you have reached FRA. Still there are taxes to consider.

Up to 50 percent of your Social Security benefits may be taxable if your earned income is above certain (relatively low) levels. Earn more than that threshold and 85 percent of your benefits become includable for income tax purposes.

Delaying Benefits Past Full Retirement Age

Delaying Social Security benefits until after full retirement age can boost your income.

Your benefit increases by 8 percent each year past FRA until age 70. If your full retirement age is 66, your benefits could increase by nearly a third if you delay taking them until age 70.

Other Factors to Consider Before Collecting Social Security

Bear in mind that you can’t game the Social Security system.

Delaying may not get you more money than if you start collecting prior to FRA. The reason for this is that while your benefit amount will be lower, you’ll be collecting it longer. Your health and longevity are the main things that will affect your aggregate lifetime payout.

People in poor health, or who reasonably expect to have a shorter-than-average lifespan would likely benefit from taking their Social Security as early as possible. On the other hand, people who have reason to believe they may live a longer-than-average life may benefit most from delaying the start of their benefits for as long as possible.

Social Security benefits are based on actuarial tables and designed to be neutral at typical life expectancy.

The “Take It and Invest” Myth

Social Security increases over time – whether collected or accrued – and are based on actuarial tables. Some believe this discounts the time value of money, and creates opportunities for investors. Theoretically, you could begin drawing Social Security early, invest it rather than spend it, and end up ahead. There are two inherent problems with this notion.

The first considers those who apply for benefits early because of need. For this group, Social Security delivers on its intended purpose – it is an old-age pension. It represents an important source of income for them. These recipients likely do not have the ability to trade current income for future gain.

The other group of recipients – who can afford to save their benefits – may also find the strategy unappealing. This is especially the case if the additional income makes their Social Security benefit taxable. Generating additional taxable income or gains could make the strategy less effective.

Optimizing Social Security Benefits is Unique

Creating retirement income roughly equal to what you make (or made) in the last few years of your working life takes careful planning. Social Security benefits need to be considered in that planning process.

The reason for this is that you earned those benefits and you should do all you can to maximize them. At the same time, your Social Security benefits have an affect on when and for how long you can use your other sources of income. There are tax consequences if you don’t get the mix right. And your goal should be to optimize all of your resources.

Optimizing Social Security benefits is, therefore, unique. Not in that it is rare, but that it is individual. It’s unique to you. Your health, gender, life expectancy, and total financial resources are all factors that must be considered in the decision.

You can take steps to put yourself in control and be able to make the best decision for yourself when the time comes. Victory Capital can help.

Our Retirement Planner Calculator can show you how your retirement savings will last under different scenarios. Our Required Minimum Distribution calculator can show you what distributions will be required from your qualified accounts now and in the future. Our Member Service Representatives are available to answer any questions you have about retirement planning and optimizing Social Security benefits. 

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