Ten Reasons to Claim
John Yeigh | Sep 13, 2022
IN MY FIRST ARTICLE for HumbleDollar nearly four years ago, I said I’d claim Social Security benefits at my full retirement age of 66 and two months. By claiming mid-way between 62 and 70, I intended to hedge my bets, because I couldn’t know such relevant variables as my lifespan or future tax rates, inflation rates and investment returns.
And I did indeed claim Social Security recently, though—full disclosure—it was nine months after my full retirement age. Here are the 10 factors that influenced my decision:
- I may have challenged genes. Not a single family member on my mother’s side has made it to age 80. I hope my daily exercise, moderate weight, lack of smoking and more balanced diet may help offset my family’s clear lack of longevity.
- The added Social Security income means we won’t need to take taxable IRA distributions or realize capital gains from selling investments over the next five years.
- By claiming earlier than age 70, my Social Security payment is somewhat reduced. This will marginally help our tax situation beginning at age 72. That’s when required minimum distributions are scheduled to kick in—and when our tax rate is likely to rise.
- Today’s low federal income tax rates are slated to sunset at year-end 2025, so the tax on my Social Security payments should be somewhat lower for the next three-plus years.
- We live in one of the 37 states that doesn’t tax Social Security income, so I won’t incur added state taxes from claiming earlier.
- To solve the future Social Security funding shortfall, many of the suggested fixes include reducing benefits for those with moderate to higher incomes. A recent bipartisan poll indicates that more than 80% of Americans support some sort of benefit reduction for the financially well-off. If that happens, claiming earlier may prove to be a wise move.
- The Social Security Administration can forevermore administer my Medicare premiums by deducting them from my Social Security payments.
- I would be extremely frustrated if I delayed Social Security until age 70 and then subsequently suffered some major physical deterioration so I was unable to enjoy the extra money, even if I did live beyond the age 80 or so financial breakeven point.
- I no longer need to evaluate the tradeoff of when to claim. I can move on from this debate, which—frankly—just feels good.
- Claiming Social Security near my full retirement age, versus claiming at either age 62 or 70, guarantees that I’ll be at least half-right.
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The $25,000 and $32,000 thresholds for taxation set in 1983 have not been raised since set into law. Meanwhile the medium household income in 1983 was just under $25,000 as compared to 2021 which is just under $71,000. The way I see it our Social Security benefits have been reduced every year since President Reagan signed the law in 1983 via means testing from the IRS. It’s well past due to adjust the thresholds upwards.
What do you know?! It’s already time for my wife to claim….and answering that question seems to be what everyone else’s comments are about, too. I better find that next article “how to file for social security!”
John: You didn’t mention your wife’e life expectancy. Did that factor in to your decision?
My wife’s family is longer lived, so she likely will outlast me by a decade or more. She also worked, so she initiated SS a bit past FRA based on her own past income. Her life-expectancy did not factor in the decision, but she more than me felt comfort by initiating the annuity type cash flows so she can more easily manage monthly expenses versus cash needs.
I remain puzzled by the concern I keep seeing about breaking even. I waited until 70 to get the largest possible annuity income (and I did not need to draw on my investments while I waited). If I knew I would drop dead tomorrow it would not bother me in the slightest that I did not break even. I would appreciate the larger payments I enjoyed while I was alive.
Exactly right. What matters is getting the income you need when you need it.
Thanks for posting and confirming my choice of claiming SS at age 66. I retired at age 66 and immediately began taking SS in addition to a nice pension. I had the resources to delay until 70. I analyzed the situation and the breakeven point for me was age 82. The oldest of the last 4 paternal males was 73 and my maternal grandfather died at 56. That seem to clinch it for me that taking at 66 was the right choice. I turn 78 tomorrow and am still in reasonably good health. No regrets.
My wife started social security earlier than me and is 18 months older than me if that would have mattered.
I first claimed at 68 for some of the same reasons – but mainly three: (i) when I considered the after-tax impact on SS and tied programs at 68 vs 70, the impact was small; (ii) I felt the return I’d get from keeping my existing investments at work for me would easily offset the slightly-lower SS at 68 rather than 70 (they certainly did), and (iii) I wasn’t greedy about getting those last dollars from the government, my compromise with myself got me most of the way there and it removed any further angst over the issue.
I do this math in my head all the time. We’re 62 and planning to retire at 65. Our FRA is 67. We’ve already mapped out a monthly budget in retirement (which will have to be adjusted as we get to the real date), and our two pensions should just about cover that monthly spending plan—but we might want some wiggle room in that budget. Once we file for SS, we’ll live comfortably on those two sources of income, so there’s a 2-to-5-year period to cover in terms of the “wiggle room.”
We could (a) withdraw from our retirement accounts to cover the extra, (b) have one of us file for SS at 67 and the other at 70, or (c) diligently save enough cash in the next three years to provide the extra income we’d want before claiming SS. (Obviously, once RMDs hit in our 70s, this all becomes very easy. But we’re trying to delay claiming SS at least until 67 and ideally until 70, and we’re hoping not to touch our retirement accounts at all other than possible Roth conversions.)
I’m currently leaning towards (b), and Mike Piper’s calculator actually agrees with this plan. We do have a couple more years to think about this, but if (c) is our choice, we need to be more intentional about saving more of our disposable income while we’re still working.
How different is your retirement budget from your current spending (%)?
Any reasoned decision is likely a good one. This was well reasoned, so don’t second-guess yourself!
My only quibble is with the ever-present use of the term “full retirement age.” I know that it’s in the statute, but it’s pretty meaningless. A person can claim anywhere along the line from 62 to 70 with correlating benefit amounts. There’s just nothing significant about the FRA number. As other HD writers have noted, it gives a false impression that the average / typical / smart person should stop work at 66ish. That’s plain misleading. And confusing, when you consider the different (and more meaningful) age parameters for Medicare (65) and RMDs (72).
“My only quibble is with the ever-present use of the term “full retirement age.”
Indeed.
FRA should be considered opening day of the “Social Security Bonus Rewards Round,” when the benefits of waiting start to really add up!
You are correct that FRA is a point within the 8-year continuum, and I actually claimed closer to 60% of the way through, so I may not be quite “half right.”
John your reason #3 of having a lower benefit helping as RMD’s will be starting at age 72 is interesting. I prefer a higher inflation adjusted SS benefit later and withdrawing from IRA today to offset the income. I understand that Congress’s potentially reducing benefits later is a concern as is a premature death. Live long and prosper!
Yes indeed. These decisions also sort of assume ratable income and expense needs over time which may not be the case. Income can vary due to the timing of inheritance, stock option vesting, business sale or distribution, house downsizing, Roth conversions etc. Expense needs can vary due to college, weddings, car, house maintenance, big vacation trips, business purchase, vacation house, etc. We’ve optimized as best as possible for our family’s situation.
It is also likely that Congress will raise the age for starting RMDs, perhaps as soon as this fall.
Nice summary, John, of your well-reasoned decision. The best part is that through careful consideration, you reached your right path. If only the public at large approached financial decisions as thoughtfully!
Yes, I’m totally comfortable with the decision no matter how it turns out.
Great article John. I’m going through some similar thoughts on our claiming strategy. Mike Piper/s Open SS says our optimum strategy is my wife cling at 65 and I wait to 70. When I run that scenario it seems to make sense from a state tax perspective -NJ taxes retirement income, but not SS, and has a partial retirement income exclusion based on total income. I also start Medicare this month, and can use some of the HSA funds we’ve been saving. The combination may make us eligible for all, or part, or the retirement income exclusion. I like your reason #9 – the psychic gain from not thinking about it any longer.
As an engineer, I’ve come to the conclusion that there are too many independent variables to solve the many possible equations to arrive at an absolute maximum, inflation-adjusted, after-tax NPV of SS payments….if indeed that is the only goal.
I can now move on, and it does feel good.
I agree. I started SS at my FRA while still working and invested the money until I used the monthly benefit as income a couple of years later.
I wouldn’t worry about means testing. Should that ever happen no doubt there would be a long grandfathering period.
Means testing of any kind would undermine the very foundation of SS as originally designed. A self sustaining program equally applied to all workers and kept out of the federal budget.
Means testing as a solution to the trust shortfall simply says many Congresses have failed to manage the program to adjust for demographic changes over the years despite annual warnings from the Trustees.
Sadly, Americans don’t hold Congress accountable, but frequently embrace solutions that only affect the other guy. If Congress had modestly and regularly adjusted SS to assure solvency there would be no need for current discussion of how to save the program. Part A of Medicare as well for that matter.
I also think means testing is a non-starter. I think it is much more likely that Congress will raise the payroll tax cap and/or the FRA. Previous changes haven’t affected older taxpayers and I also don’t expect that to change. (For example, the 1983 law that phased in the increase in the FRA didn’t start affecting individuals until 2000.)
I agree. I also wouldn’t be surprised to see Social Security benefits become 100% taxable for higher-income retirees.
That would mean paying taxes on after tax payroll contributions.
Folks are already getting taxed on 85% of their benefit. What’s another 15%? Plus it would simplify tax filing.
Social Security benefits are already means-tested via taxation; the higher your income, the less of your SS that you get to keep. The idea of adding even more layers of means-testing to the program is (hopefully)a non-starter, a misguided solution in search of a nonexistant problem.
That’s true of virtually all income isn’t it?
Ordinary income, yes.