As you approach retirement age, it’s important to take inventory of your savings and map out a strategy for managing your retirement income. A key component of this strategy is selecting the right time to begin collecting Social Security benefits. You have the option of starting benefits as early as age 62 or as late as age 70 and, depending on your circumstances, your choice will have significant financial and tax implications. Here are some factors to consider in determining when to pull the trigger.

What’s Your “Full” Retirement Age?

Full retirement age (FRA) — the age at which you become eligible for your full Social Security benefit — is based on your year of birth. For example, if you were born between 1943 and 1954, your FRA is 66, and if you were born in 1960 or later, it’s 67. For those born from 1955 to 1959, the FRA falls somewhere between 66 and 67.

How Much is Your Monthly Benefit?

Your monthly benefit is based your earnings history and your age when you begin collecting benefits. For example, a person with the maximum level of earnings who begins collecting benefits in 2020 at age 66 will receive an initial monthly benefit of $3,031. You can project your benefits by setting up an account with the Social Security Administration at www.ssa.gov. In addition to showing your earning history and expected benefits, the site offers several calculators you can use to see how your benefits would be affected by various scenarios.

If you begin collecting benefits before reaching FRA, they’ll be reduced by up to 30 percent. If you postpone benefits past FRA, they’ll increase by 8 percent each year, up to a maximum of 32 percent.

Will You Outlive Your Life Expectancy?

Once you start collecting Social Security benefits, they continue at the same rate (with cost-of-living adjustments) for the rest of your life. Assuming you don’t need your Social Security benefits right away to fund your living expenses, it’s usually preferable to delay these benefits. Unless you have health concerns that may prevent you from reaching your statistical life expectancy, waiting until FRA or later is the best way to maximize your lifetime benefits.

Are You Still Working?

If you’re thinking about taking Social Security benefits early and you’re still working, keep in mind that your benefits will be reduced by $1 for every $2 you earn above a specified threshold ($18,240 in 2020). And, in the year you reach FRA, they will be reduced by $1 for every $3 you earn above a separate threshold ($48,600 in 2020) up until the month you reach FRA.

These benefits aren’t permanently lost; they’re merely deferred. Your benefits at FRA will be increased to reflect benefits withheld on account of earlier earnings. But it’s important to take this treatment into account as you weigh the pros and cons of taking early benefits.

What Are Your Other Sources of Income?

It’s helpful to think of Social Security as an investment. For example, delaying benefits beyond FRA to take advantage of higher rates is the equivalent of making an investment with a guaranteed 8 percent return. If you anticipate lower returns on your other retirement savings, you may be better off using those vehicles to fund your living expenses and allowing your Social Security benefits to continue growing. On the other hand, if your other savings are likely to yield returns higher than 8 percent it may pay to do the reverse.

Other income may also affect the taxability of Social Security benefits. If your income — defined as adjusted gross income plus tax-exempt interest and any excluded foreign income plus half of your Social Security benefits — exceeds certain thresholds, then a portion of your Social Security benefits are taxable. Currently, taxpayers with income between $25,000 and $34,000 ($32,000 and $44,000 for joint filers) are subject to tax on up to 50 percent of their benefits. And those whose income exceeds $34,000 ($44,000 for joint filers) are subject to tax on up to 85 percent of their benefits.

A Complex Decision

Timing Social Security benefits is a complex decision and the factors discussed above are just a few of the ones you’ll need to consider in determining when to begin collecting. Although not discussed in this post, the process is even more complex for married couples, especially when spousal or survivor benefits are involved. For more information about how to make this determination or about Social Security in general, please contact us.