Quick, when should you start taking your social security withdrawal payments? Age 62? Age 66? How about age 70? Which will give you the most money in your remaining life? Which will give you the largest monthly payment? What about your surviving spouse, when should you start payments for his/her benefit?
Lots of questions to consider. Don’t just, willy nilly, start taking money from Uncle Sam just because suddenly free money became available to you, you have to look at a bigger picture.
We understand, who doesn’t want free money? The temptation is overwhelming to start taking it as early as possible. But a little bit of knowledge and discipline could make for a lot more financial security in the long run.
Also, imagine a world where the most powerful country with the most robust economy will pay you a monthly check for life! And, it’s transferrable to your spouse should you die. Hello Santa Clause. But then again you (and your employers) have been contributing into the system your entire working years, now it’s time to get smart about when to start pulling it out.
So, the challenge becomes how to maximize that funding for your unique circumstances. It may mean taking it just as soon as you turn 62, or it may mean waiting until your 70, or somewhere in between. We’ll help you to do the math.
Social Security Basics
Why Social Security Exists
Just a little perspective as to why social security exists in the first place because it wasn’t always the case.
Franklin Roosevelt and the Depression Era
Originally Meant to Open up Jobs to Young Unemployed Men
In the midst of the Great Depression, no not the one in 2008 but the one in the 1930’s, there was rampant unemployment running as high as 20%. People were destitute.
Many of those unemployed were young strong capable men. The last thing a leader wants is a huge cohort of unemployed, starving, bitter men, it’s what revolutions are made of. One way to open up jobs for these young men was to retire old men that were usurping jobs because they had no other means of sustaining themselves.
FDR needed a program to provide income to these old workers and get them gainfully retired. Rumor has it that he looked at the precedent set by Otto Von Bismarck in Prussia/Germany where Bismarck introduced the” Old Age and Disability Insurance Bill of 1889”. It was an old age pension program, financed by a tax on workers, designed to provide a pension annuity for workers who reached the age of 70 so they could retire.
Bismarck was in no danger of his pension program financially tanking the government because the average life expectancy at the time was less than 50 years of age. So much for generosity.
Fast forward a couple of decades and The Social Security Act in the U.S. was signed into law by FDR in 1935 in the middle of that Great Depression. It would pay workers 65 and over continuing income after retirement and would be funded by payroll taxes.
The effect of this act was twofold, first it provided “security” to the aged and secondly it opened up jobs for those restless young males. Mission accomplished.
Not Meant for a Cozy Retirement on the Government’s Coffers.
Retirement via social security was never meant to be a life among the palm trees in winter and constant golfing. It was merely a stop gap so that the elderly could help meet their basic living expenses.
In fact it wasn’t supposed to be a heavy financial burden by the U.S. government because most retired workers didn’t live that long.
Life expectancy at birth in 1930 advanced to only 58 for men and 62 for women. Since this was actually less than the social security retirement age of 65, people weren’t drawing down from the system for very long.
Today it’s a totally different story with much longer life expectancies. Many boomers will live to their eighties and nineties. Those a lot of years to have to finance and you need to make sure you don’t outlive your money. And, having a substantial social security check will help you get there.
Know your Eligibility Age
Federal Insurance Contribution Act Taxes
Recall looking at your paycheck stub and there was a withdrawal for FICA, which is your contribution into the social security pot. Since you were old enough to be employed you’ve been paying into the system. Today that rate for both you and your employer is 6.2% to social security and an additional 1.45% toward Medicare. At the end of a long career it all amounts to a sizable chunk of change.
You earn credits based on those withholdings — up to 4 credits per year. When you reach 40 credits and you’re of age, you get to start making withdrawals.
Social Security Math
The Social Security Administration will automatically send you an estimate of your anticipated retirement payments on a scale ranging between the ages of 62 and 70.
Start with what you Will Earn at Minimum Eligibility
There are many situation of older American struggling financially as they enter their sixties and can barely make ends meet. As a stopgap in 1961, social security was amended to provide benefits beginning at age 62 albeit at a much reduced rate than at the full retirement age.
So a single person that is unemployed, underemployed, or otherwise barely meeting living expenses may be forced to start taking social security at the earliest, at age 62. That will add another income stream to whatever they currently have and that makes total sense for these special circumstances.
However, those people turning 62 and do have their living expenses covered by other means and see this largess as “play money” should probably rethink.
Should your full retirement age be 66, filing for Social Security at 62 will slash your monthly benefit by roughly 25%. Using simple math, if you’re scheduled to receive $2,000 a month at age 66 but choose to start receiving at age 62, you will receive the reduced amount of $,1500.
So you would have $500 less income per month for the rest of your, and possibly your spouse’s, life. Would you really want to leave that much on the table? What if you live to age 90? That’s a lot of mula.
Set a Goal to Wait Until at Least Your Full Retirement Age
So assuming you’re still gainfully employed and can meet all your living expenses, it is best to wait before starting your social security withdrawals. Below is a table to calculate your full retirement age:
| Birth Date | Full Retirement Age |
| 1937 or earlier | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| between 1943 and 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 or later | 67 |
Tax consequences
In addition to your social security payments being lower before your full retirement age, if you are working as much as 85% of your social security income is taxable if you earn over $34,000. So it pays to wait especially if you plan to stop working altogether at your full retirement age.
A Penalty to Your Spouse if you Start your Claim Before Your Full Retirement Age
It’s difficult to think about death but highly necessary. There is a penalty to your spouse in two ways: (1) if you don’t max out your social security payments, that lesser amount will be the amount they will receive for the rest of their lives (assuming they don’t have their own high level social security). (2) Should they be younger than their full retirement age (they can apply for reduced benefits as early as age 60), the number is further reduced on a sliding scale beginning at only 71.5% and incrementing up each year.
The best case scenario is for you to attain your full retirement age or higher before receiving benefits. Then if the widow or widower has reached their own full retirement age, they can get their deceased spouse’s full benefit.
Make an All-out Effort to Reach Full Retirement Age
In the case where you were downsized out of your career job at roughly age 62, you may be tempted to hang up your spikes and just retire from the workforce and initiate your social security withdrawals – stop, get creative and think of alternatives.
Again, you have the most stable institution in the world ready to pay you for the rest of your life, try your best to bump that up. Consider taking on “any job” to make ends meet for the 2-4 years it will take to reach full retirement age, even if it means becoming a Wal-Mart greeter.
It pays to Take Social Security Payments Even Later than Full Retirement Age
In the year 2000 the Social Security Administration allowed for the delay in taking social security benefits in exchange for a higher monthly payout. It increases anywhere from 6.5% to 8% per year and then caps off when you turn 70.
Let’s say at age 66 you’re doing O.K. financially and can meet all your living expenses by other means, you should consider delaying receiving payments so that you get an even higher monthly payment. The Social Security Administration will increase the payout by a certain percentage based on your age according to the below table.
| Year of Birth | Yearly increase rate |
| 1937 – 1938 | 6.5% |
| 1939 – 1940 | 7.0% |
| 1941 – 1942 | 7.5% |
| 1943 or later | 8.0% |
So, in our example if you’re a boomer and you’re scheduled to receive $2,000 per month in payments at full retirement at age 66, for each year you delay, you will receive 8% more money in your pocket. It looks like the below:
| Age | Monthly payment |
| 66 | $2,000 |
| 67 | $2,160 |
| 68 | $2,333 |
| 69 | $2,519 |
| 70 | $2,721 |
So, if you can hang in there until age 70, you will enjoy an additional $721 per month, sweet.
When are you going to die? Who the hell knows
It’s too bad we all know our birth date, but none of us can project our death date. If you start taking social security payments at age 70 and suddenly drop dead of a brain aneurysm at age 71, the government wins, and you only get a 1 year payout (again, your spouse may enjoy the benefit for many years to come).
The above chart shows a comparison of 3 scenarios of beginning social security withdrawals. The Green line represents what a standard payout of $2,000 a month would look like at full retirement age of 66.
The green line represents starting the payout at age 62 but starting with a lower payout of $1,500 per month.
The red line represents a starting payout at age 70 with a monthly payout of $2,721.
At age 70 the green line full retirement age cumulative payout of roughly $288,00 equals that of the blue line age 62 cumulative payout and then the line crosses to be greater for the rest of your life.
At age 81, the red line retirement payments began at age 70 crosses the line of both the full retirement age green line and the blue line of those taken at age 62 and will remain greater going forward.
In other words at about age 81 you would have maximized you possible take-out value from Uncle Sam. Not an outlandish possibility.
Take Health into Consideration When Choosing When to Retire
Even Las Vegas bookies can’t predict just when you’re going to die, but there are correlates. Perhaps you have severe chronic conditions related to heart disease or diabetes. Perhaps longevity just didn’t run in your family. These are very strong facts to consider when deciding not to shoot for a 70-year-old retirement, but at the least shoot for age 66.
The higher the beginning rate, the higher future COLA
The bane of senior citizens on fixed income is inflation. Inflation silently erodes purchasing power. Knowing this, the government instituted a “Cost of Living Allowance” or COLA. COLAs were first paid in 1975 as a result of a 1972 law.
Prior to 1972, COLA benefits were increased irregularly by special acts of Congress. Today it is based on the consumer price index (CPI).
For example the COLA increase in 2021 is 1.25%.
Another reason to max out your retirement is that each year you’ll receive a higher bogey. Right now inflation is under control but later on in your retirement it can flare up and the more protection you have the better.
The Decline in Pensions
Pensions are rapidly taking place aside museums with buggy whips. Oh they’ll be around for a while in the public sector for teachers, firemen, police and state workers especially. But in the private sector – sayonara!
Private sector pensions gained traction during the boom decades that followed World War II. Large corporate employers took a paternal approach to their workers and offered pensions as part of their talent recruitment and retention efforts.
And it worked. It was not uncommon for workers to spend their entire careers at the same company back then. You may remember your grandfather working at a single company his entire life and then retired with a pension.
With the demise of pensions that onus of financial independence in retirement rests solely on the individual. With aggressive savings and investing in your IRAs and 401(k)s, and with your new found knowledge of maxing out your social security payments, you’re on your way to a world class retirement.
Don’t Mess up the End Game
Congratulations, you worked hard your entire life and contributed to the social security fund, don’t mess up that all that hard work by fumbling at the end. Your task now is to maximize your take-out value and that will require a little bit of creativity and a lot of disciplined. But, one day beginning at age 66 or 70 you will have a larger deposit to your account for the rest of your days – what a security blanket.