Social Security benefits account for 50% or more of retirement income for 66% of retirees, according to the Social Security Administration. For 35% of retirees it accounts for 90% or more of income. Given the importance of social security payments in retirement, maximizing benefits becomes essential to retirement planning.

That leads to the question of, “When is the best time to take social security?” One school of thought is to take it as early as possible so you will receive benefits for the longest period of time. The other side of the fence tells you to wait as long as possible to receive the highest payout. But which option is best for you personally?

How Much Income Do You Need in Retirement?

For the majority of seniors who have fallen behind, funding retirement concerns can keep you up at night. The trouble is, there is no one-size-fits-all formula for knowing exactly what you need to maintain your quality of life. There are too many unknown variables.

You are trying to prepare for an unknown future. Will you remain in good health? Will you live to 100? Will you need money for a nursing home? If so, how will you pay for a couple of decades in which you are not working.

One way to hedge against this unknown world of retirement is to have an annuity that will pay a set amount, regardless of how long you live, that also adjusts for inflation. Social Security provides that annuity, giving you guaranteed income for life. With pensions fading into the background, it is one of the few sources of income that is not directly impacted by markets and other factors in which you have no control.

Retirement income generally comes from a few basic sources: social security, work pensions, individual investments such as funds in 401Ks and IRAs, and income from sources like rental property or royalties. If these income streams do not total enough to cover your living expenses, you will need to reduce expenses, continue working, or take out more from investment accounts earlier, leaving you vulnerable.

Sobering statistics for personal savings are the norm. With the average household between the ages of 55 and 65 having only a little over $100,000 in savings, taking extra out each month to fund shortfalls could compromise your standard of living very quickly.

Personal Health and Lifestyle Factors That Impact Social Security Payment Timing:

  • Check Your Family History. Having parents and grandparents who lived to be 90 or more can be a good predictor that you will live a long life. Add new technology and improved health care and you could live well beyond those who have gone before you. Genes are a significant factor in how long your life expectancy will be.
  • What’s Your Overall Health? What health problems are you currently experiencing? What health problems are seen in your family. This is another good predictor of what retirement might look like for you. A parent who died of a heart attack at an early age, could mean your longevity is at risk. However, new drugs and therapies are offering solutions to common health ailments and extending life. Today there is better education and better technologies available to cure and prevent disease.
  • What is Your Lifestyle? Those who exercise regularly and eat healthy have a much better chance of living longer. Your daily habits will also factor into your personal life expectancy. This is the factor you have the most control over. Any measures you take today to improve your health can impact longevity.

Life expectancy tables suggest a male at the age of 65 will live another 17.9 years or to the age of 83. While a woman is expected to live another 20.3 years to the age of 85. These rates are significant because if you choose to retire at 65, you must expect to pay for 20 plus years of retirement, for those in average health. That’s a really long time for $100,000 in investments to last.

Impact of The Age You Take Benefits

Early Retirement can start as early as 62. Making this choice will reduce payments by 25% to 30% depending on what your full retirement age is and how many months early to take the benefit. The longer you wait the higher the payout will be.

When taking early retirement benefits, you face an income cap that must also be considered. In 2015 you could earn $15,720 without paying a penalty in the form of a benefit reduction. If you surpass this amount you lose $1 dollar in benefits for every $2 in income.

Full Retirement is either 66 or 67 based on the year you were born. Waiting until full retirement will result in you receiving 100% of the benefit payout. The income threshold is eliminated and the social security payments might be tax-free depending on total household income.

Waiting to Take Benefits Until Age 70 will maximize the payout which will be enjoyed the rest of your life. When you wait beyond the full retirement age, you are given an 8% increase for each year you wait. There is no incentive to take payments past the age of 70.

An Example: Let’s say your full retirement benefits would be $1,000 a month. (The average payout in 2015 is $1,328)

Taking Social Security at the age of 62 could result in payments reduced to: 700 to $750 per month. This is a total of $8,400 to $9,000 as opposed to $12,000 at full retirement.

Waiting until you are 70 increases the $1,000 payment to around $1,360 a month or $16,325 a year. That is almost double the payout offered at age 62. To get a closer look at your personal situation visit the social security calculator at, http://www.ssa.gov/planners/retire/agereduction.html

Other Factors to Consider

Will You Still Work? If you plan to continue working, it will benefit you to wait on social security payments to avoid any income penalty. This will also allow the monthly benefit to increase and reduce the overall investment funds required to maintain your quality of life.

Do You Have Minor Children? When benefits begin any minor children might also qualify for a benefit. If so, this amount could tip the scale for taking benefits earlier. However, the lower payments will be with you for life.

Personal Circumstances may dictate when you MUST take benefits, rather than when you want to take benefits. If you are laid off from a job and unable to find suitable work, have health issues, or become disabled, taking social security early may be the lifeline you need to get by.

When to take social security payments is one of the most important decisions you will make in retirement. Once you begin benefits you cannot stop and restart, making this decision critical to any retirement planning.