Client Conversations

Social Security: It Could Pay to Wait

Your clients' Social Security benefits are likely an important part of their retirement income plan, so help them choose the timing wisely.
Key Insights

  • Delaying when you receive your benefits will lead to higher monthly payments.
  • Working while receiving early benefits is generally not your best option.
  • Cash flow needs, your spouse’s plans, and your financial goals are all important factors to consider.

After decades of paying into Social Security, Americans in their 60s must decide when to start receiving their benefits. According to an analysis of Social Security Administration (SSA) data, between 50% and 60% of workers elect to receive their Social Security benefits before their full retirement age (FRA).(See “Your Full Retirement Age.”) While that may be the right move for some, many savers will benefit from delaying payments until their FRA, or even delaying until age 70, to maximize the size of their monthly benefit.

Age and Work Can Affect Your Benefits

The size of your benefit will vary depending on the choices you make, including when you file for benefits and whether you earn income while receiving benefits. For instance, you qualify for 100% of your benefit if you file at your FRA. But filing early—at age 62—can lead to an almost 30% reduction in benefits. By comparison, your benefit increases by 8% for every year past your FRA that you delay receiving it, until you reach age 70. For example, someone who reaches FRA of 66 in 2020 but waits until age 70 to file would receive a 32% increase in their benefit. There is no additional benefit for filing after age 70.

Your benefit increases by 8% for every year past your full retirement age that you delay receiving it, until you reach age 70.

Working while receiving early benefits can further reduce the size of your benefits. If you exceed the 2020 earned income limit of $18,240 per year, your benefits will be reduced by $1 for every $2 you earn above the limit. “If you are going to continue to work, you should wait to take Social Security if at all possible,” says Roger Young, CFP®, a senior financial planner with T. Rowe Price. If you work while collecting Social Security, your benefits are recalculated in the month you reach your FRA to account for the amounts withheld. As a result, while the reduction for the excess earnings isn’t permanent, the reduction tied to filing before your FRA is.

Your Full Retirement Age

FRA varies depending on your birth year.

Year of Birth Full Retirement Age
1943–1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

Source: SSA.gov.

Questions to Consider

Since most people rely on Social Security for at least part of their income in retirement, it’s important to make choices that maximize the impact these benefits have on your retirement income plan. (See “Why Claim Early or Later?”) To that end, consider the following questions:

Will you continue to work? Receiving early payments while continuing to work can reduce your benefits. If you do plan on working, consider delaying your benefits at least until your FRA.

  • What is your life expectancy? While this question can be difficult to address, you can use some available information to think about it. Considering the longevity of relatives or your current health is a good place to start. Additionally, you can use an estimate from sources like the SSA Life Expectancy Calculator. The longer a person expects to live, the more it makes sense to delay Social Security benefits. If you have known medical issues or otherwise believe you won’t achieve the average life expectancy for someone your age, however, you may want to consider receiving your benefits early. But women and people with higher incomes, who tend to live longer than average,are among those who should consider delaying.
  • What are your financial priorities? If you expect to have higher expenses early in retirement and aren’t worried about outliving your assets, then receiving your benefits early can help meet those priorities. However, if you are concerned about longevity risk—namely, the risk of outliving your assets and income—then delaying would likely be a better option.
  • What will your spouse do? Couples must also plan when each spouse should file for benefits. The higher-earning spouse should consider delaying to receive the highest benefit possible, particularly to maximize the future survivor benefit. “The lower earner may still want to take their benefit early,” says Young. “This way, they get some income while they’re in their 60s, while the higher earner waits until age 70 to begin collecting benefits.” If both spouses claim early, the surviving spouse may be startled by the size of the benefit reduction when their partner passes away.
  • Will you have other sources of income? If you expect to receive a pension or have other sources of guaranteed income, you might choose to file for early benefits if doing so allows you to delay drawing down your savings. This strategy is most appropriate if the pension and early benefits allow you to be more aggressive with your portfolio’s asset allocation, thus positioning your investments for greater potential growth. “Social Security essentially includes an implied return of around 3% in its calculation of the benefits of delaying,” explains Young. “So, you could take Social Security early and then not draw down your assets as quickly if you think you’re going to make more than that 3%. However, remember that the 3% implied return from Social Security is essentially risk-free.”

Social Security may account for 35% of your total retirement income.

Weigh Your Options

It may be tempting to begin receiving your Social Security benefits as soon as possible—particularly after years of paying into the program. But without carefully weighing your choices, you risk short-changing yourself by taking reduced benefits. Delaying until your FRA—or possibly even until age 70—can help you maximize your benefits. That strategy can help bolster your income plan for a retirement that could last three decades or more.

Why Claim Early or Later?

Multiple factors influence when you should file for your Social Security benefits.

Reasons to Consider Claiming Early Reasons to Consider Claiming Later
Stopped working and need cash flow Still working
Short life expectancy or known medical issue Good health or family history of longevity
Spending early in retirement is a high priority Concerned about outliving your assets and income
You are the lower-earning spouse (to get extra years of benefits based on your own earnings before taking spousal benefits) You are the higher-earning spouse (to maximize survivor benefits)
Expect to receive significant pension* Limited other guaranteed income sources
Seeking more asset growth potential (with higher risk) by taking Social Security instead of drawing down investments More risk-averse (and, therefore, less likely to earn high returns on investments)

*A pension reduces your longevity risk, which may enable you to safely claim earlier. However, you may still want to claim later based on other factors above.

“Are Social Security’s Actuarial Adjustments Still Correct?” Center for Retirement Research at Boston College, November 2019.

“Mortality by Career-Average Earnings Level,” Social Security Administration, April 2018.

Important Information

All investments are subject to market risk, including the possible loss of principal.

This material has been prepared by T. Rowe Price Retirement Plan Services, Inc., for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price Retirement Plan Services, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this website, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk. All charts and tables are shown for illustrative purposes only.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

T. Rowe Price Investment Services, Inc., Distributor.

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