The common approach to deciding when to take Social Security benefits is not that helpful. Most people decide when and how to take their benefit based on a perceived need for income. One common approach is to take it as soon as they are eligible. If they are still working at age 62, but feel they need some extra money, they apply for their benefit. Another common approach is to apply for Social Security so that it coincides with retirement. It can be uncomfortable to live without earned income, so there is an urge to replace it, as much as possible, with other sources—like Social Security. At the other end of the spectrum, many people have no perceived need for additional income, so they are content to wait to take Social Security at the latest age possible, age 70.
All of these approaches overlook important benefits. For one thing, taking Social Security at age 62 means your benefit is less than it could be. Using a complicated formula, your maximum potential benefit is reduced every month prior to your full retirement age. (Full retirement age falls between age 65 and 67 depending on your year of birth.) There are also penalties to consider for people still working.
Taking your Social Security benefits at retirement would seem to make sense, and a lot of people do it, but doing so means foregoing an increase in benefits. People get 8% per year increase in benefit for every year after full retirement age that that they wait to take their benefit. (These increases cease at age 70.)
The patient few who wait until 70 for the highest possible individual benefit have waited too long to take advantage of spousal benefits.
The only way to make sure to get the most from what you have paid into Social Security is to slow down and test different scenarios for taking your benefits. With the aid of sophisticated software, this is a painless and illuminating exercise. It allows couples and individuals to understand the benefits and costs of different approaches and to choose the one with the greatest potential to help them fund retirement.
Slowing down to review different scenarios is, of course, uncommon—but it’s something you should do when considering when to take Social Security benefits. Because nearly everyone is eligible for Social Security, decisions around it are typically thought of as no more complex than getting a driver’s license test. Therefore, people commonly take the benefit when they simply feel it’s time rather than carefully selecting what will maximize their benefit the most. Sometimes it is smart to be uncommon—certainly when deciding on the best time to take Social Security.