Additional Coverage:
Understanding the Impact of Claiming Social Security at Full Retirement Age
Many retirees consider claiming Social Security benefits at their full retirement age (FRA) to reduce financial stress during retirement. The term “full retirement age” suggests it’s the ideal time to begin benefits, and indeed, filing at FRA avoids early claim penalties. However, there are significant drawbacks to claiming at FRA instead of waiting until age 70, including lost income and missed opportunities that can affect your finances for decades.
What Is Full Retirement Age?
Your FRA depends on your birth year. For those born in 1960 or later, it’s 67. For earlier birth years, FRA varies incrementally between age 66 and 67, as follows:
- Born in 1959: 66 years, 10 months
- Born in 1958: 66 years, 8 months
- Born in 1957: 66 years, 6 months
- Born in 1956: 66 years, 4 months
- Born in 1955: 66 years, 2 months
- Born between 1943 and 1954: 66 years
Claiming benefits exactly at FRA entitles you to your primary insurance amount (PIA), also known as the standard benefit.
The Cost of Claiming at FRA
While claiming at FRA avoids early penalties, it also means forfeiting delayed retirement credits, which accumulate monthly if you wait beyond FRA, up to age 70. These credits increase your benefits by approximately two-thirds of 1% per month delayed, translating to an 8% annual boost. Waiting from 67 to 70 can raise your benefit by about 24%.
For instance, a $2,000 monthly benefit at FRA would grow to $2,480 if you wait until 70. By claiming early at FRA, you effectively lose $480 per month for life.
Lower Future Cost-of-Living Adjustments (COLAs)
Because Social Security COLAs are calculated as a percentage of your current benefit, a smaller base amount means smaller increases over time. For example, with a 2.8% COLA, a $2,000 benefit grows by $56, whereas a $2,480 benefit grows by $69.44. Over 20 or 30 years, this difference can significantly impact your total income.
Reduced Lifetime Benefits
The decision to claim at FRA versus delaying benefits involves weighing how long you expect to live. If you claim early, you receive more payments over a shorter lifespan; delaying results in higher monthly payments but fewer total months. Using the example above, waiting until 70 requires about 12.5 years of receiving the higher benefit to break even with the total amount you’d have collected by claiming at FRA.
Given that a 65-year-old today has a life expectancy of roughly 19.5 years, delaying benefits until 70 is often advantageous for longevity.
Impact on Survivor Benefits
Claiming at FRA also locks in lower survivor benefits for your spouse. Survivor benefits are based on the primary earner’s benefit at the time of death, including any delayed retirement credits not yet claimed. By filing at FRA, you forgo these credits, potentially reducing the financial security of your surviving spouse.
Tax Considerations
Social Security benefits are taxed based on provisional income, which includes half your Social Security benefits plus other taxable income. Claiming benefits at FRA while withdrawing from retirement accounts could increase your taxable income, pushing you into a higher tax bracket.
Waiting to claim benefits may allow for strategic Roth IRA conversions during lower-income years. Although Roth conversions are taxable events, future qualified withdrawals from Roth accounts are tax-free and do not count toward provisional income, potentially reducing taxes in retirement.
Bottom Line
While full retirement age seems like the natural time to begin Social Security, delaying benefits until age 70 generally results in higher lifetime income, increased survivor benefits, and better protection against inflation through larger COLAs. Although waiting may require extended work or additional savings, the long-term financial advantages often outweigh these short-term challenges.
General Money Tips for Retirement Planning
Regardless of your financial situation, there are ways to improve your money management and build wealth:
- Increase your income: Consider side hustles or part-time work to supplement your earnings.
- Grow your assets: Utilize compound interest by investing wisely and starting early.
- Take advantage of discounts and savings: Seniors can often benefit from special offers on insurance, travel, and other expenses. Avoiding common money traps can also protect your savings.
Careful planning and informed decisions about Social Security claiming age can have a profound impact on your retirement security. Consulting with a financial advisor is recommended to tailor a strategy that fits your individual needs.