What to Consider Before Filing for Social Security Early

One of the most important decisions you’ll make when planning your retirement is when to begin taking your Social Security payments. This is important to me because I have seen how making the wrong filing decision can have long-term consequences.

Though Americans are starting to recognize the financial benefits of waiting for their full retirement age (sometime between 66 and 67, depending on your birth year), many don’t hold off that long because you can take them as early as 62, though with reduced benefits.

What’s the rush?

Clients and prospective clients tell me every day that they plan to take their benefits as soon as possible. Some say they’ve been paying into the fund for years, and they intend to get their money back ASAP. Others worry Social Security will soon go away, and they want to be paid while they can.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Then there are those who expected to work until they were 65 or 66, but then they’re “downsized” in their early 60s, find it difficult to find another job and decide they need the steady income Social Security offers.

What are the consequences?

I see why filing may seem the thing to do in these situations, but I always want my clients to understand the options before they file. There are three glaring consequences that they must take under consideration:

• Lower payments for life.
• Earnings limitations on future job possibilities.
• A potentially big income hit on your spouse.

Usually, they’re aware that they’ll get more money if they wait, but they might not know how much more.

Their monthly payments will be about 30% percent higher at their full retirement age than it will be if they file at 62. And they’ll get even more — 8% per year after their full retirement age (FRA) — if they wait until they turn 70.

That’s all the incentive some people need to hang on a few years longer. But there are other things to consider, as well.

The guy who loses his job at 62 and perhaps prematurely takes his benefits when he can’t get another? If he eventually finds work, he’ll have to deal with an earnings threshold ($16,920 in 2017 if filing prior to the person’s FRA) that restricts how much he can make; if he makes more, Social Security will withhold $1 in benefits for every $2 he makes over that limit.

There’s also his spouse to consider in all this. If he’s been the higher earner in the family all these years and he takes his benefits at 62, he’s greatly reducing the amount his wife will receive if she outlives him.

Understanding all of your Social Security options, and most important, how Social Security fits into your overall retirement income and distribution plan, is essential to making the best-educated decision on when to take your benefits.

A 4-part action plan toward an informed decision

Here is part of how we help clients see how Social Security fits into their overall income plan. First, we talk to clients about their income needs and break them down into two main categories: keeping the lights on and lifestyle. My experience with clients has been that the first five to seven years of retirement are the most active, regarding lifestyle. Meaning, the extras like travel, hobbies and, of course, the grandkids create more spending in the early retirement years than later.

Second, we review their income streams. Where’s the money going to come from to fulfill those needs? Do they have a pension? Rental income? Retirement accounts? Brokerage accounts, maybe a Roth IRA? And then, of course, Social Security.

Third, when distributions start from those various sources to fulfill their needs, how does the tax return look? And we don’t look at just this year, but at future years, too. Then we analyze what happens if more money is taken from one source, say, a retirement account, while holding off on Social Security, letting Social Security grow and adding it back in later at a greater amount. Does this create a lower tax obligation on the retirement account distribution? This also can help lower the required minimum distributions (RMD) on those retirement accounts at the age of 70½ and beyond while achieving the maximum amount of Social Security.

Last, and I believe a very important part, is to create a surviving-spouse scenario, removing all income associated with the other spouse (Social Security, pension, etc.). How does that change the income for the surviving spouse? This can shed light on how important delaying at least one spouse’s Social Security can be for the surviving spouse.

The bottom line

These are just some of the things I believe people should be thinking about before deciding when to file for Social Security benefits, especially if they don’t have a traditional pension — because that means Social Security is their pension. The choices they make about how and when to take Social Security won’t affect just them, they will impact their family and their legacy.

Before you decide to rush down and file for your benefits — whether it’s because you want the money, or you feel you need the money or you listened to what I believe are overblown media reports and you’re worried the fund will run out of money or the government will take Social Security away — please take the time consider all your options.

By reviewing multiple holistic scenarios, you’ll be better prepared to make a calm, confident and informed decision about this very important part of your retirement future.

Kim Franke-Folstad contributed to this article.