Withdrawing from Social Security is an important financial decision when it comes to retirement. Social Security is often referred to as a foundation of all retirement planning, and one of the legs of the three-legged stool metaphor.

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Simplistically, the dilemma of withdrawing from Social Security is either more money for fewer years, or less money for more years. But in reality, the timing is much more complex as there are many other factors in getting the most out of your money.

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In this article, we will be explaining how Social Security works, what benefits you get for delaying withdrawal, and help you consider when might be the best time for you.

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What is Social Security?

Social Security is a shortened term for the Old-Age, Survivors and Disability Insurance (OASDI) program in the US, which is a program designed to support people in their retirement, or those with disabilities.

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This program is run by the Social Security Administration (SSA), which is an independent agency of the US government, hence the term ‘Social Security’ is used to describe the program.

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How Social Security works

Social Security is paid for by employers and employees and offers regular monthly payments to those in need. The most common way that people receive Social Security is when they reach retirement age.

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Employers and employees each pay at least 6.2% of the employee’s wage. If you are self-employed, then you will pay 12.4%, as you have to contribute as both an employer and employee.

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Social Security credits

Social Security is measured with ‘credits’ which are accumulated depending on how much you earn. As of 2024, you will receive one credit for every $1,730 earned. You can accumulate a maximum of four credits per year.

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You can redeem Social Security for disability much sooner, but in terms of retirement, you must have at least 40 credits, which is the equivalent of around 10 years of work. 

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When you reach retirement age and come to withdraw your Social Security, the amount you receive will be calculated based on your contributions. In total, your benefits will be calculated on your 35 highest-earning years. If you take out your Social Security early, then zero-income years are included in the calculation, which means that your overall benefit will drop. 

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Is Social Security a pension?

No, Social Security is not a pension. A pension and Social Security are separate streams of income but often come together in retirement. A pension is a defined benefit plan which will normally be a 401(k) or an IRA if you choose to fund it yourself.

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Social Security is a mandatory payment system which is run by the SSA. Pensions can be collected at 55, whereas for Social Security you must be at least 63. These two income streams combined with savings and investments form the stool metaphor mentioned earlier.

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Withdrawal times for Social Security

The age at which you withdraw will affect how much you can get. As a rule of thumb, waiting longer will mean you can get more from your Social Security.

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Withdrawing from Social Security ideally should be as late as possible in order to obtain the most benefits. However, retirement should always depend on you, so if you want to retire early, you should plan accordingly.

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Each threshold for benefit levels is determined by your age when decide to withdraw. Here are all the levels of withdrawal times for Social Security, with the age and received benefits:

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Early Retirement

The earliest you can withdraw from Social Security is currently 62, and you can make an application when you are 61 years and 9 months of age). 

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However, if you choose to take early retirement, your overall benefits will be reduced. This is based on a reduction of 0.56%, times the amount of months until retirement age.

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So for example, if your Full Retirement Age (FRA) is 67, and you withdraw at 64 (a difference of 36 months), this will be a difference of approximately 0.56% by 36, which is around 20%.

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If your withdrawal time is more than 36 months before your FRA, then the additional months are subject to a reduction of around 0.416%.

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For the earliest possible retirement withdrawal, at 62, with an FRA of 67 (a difference of 60 months), your reduction would be around 30%. This would be a reduction of 20% from the 36 months, and then a reduction of 10% from the additional 24 months.

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Withdrawing retirement early is not necessarily a bad thing. Those with poor health and lower life expectancy may need to withdraw it earlier. Even those who want or need to stop working may decide to take out their Social Security earlier. Some jobs can be tough on health, so taking early retirement may be an overall benefit to quality of life in the long run.

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Full Retirement Age (FRA)

Your Full Retirement Age (FRA) is determined by when you were born. As you can see from the table below, this age has been slowly increasing and will continue to increase each year.

Once you reach your FRA, you will receive 100% of your retirement benefits with no reductions.

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Delayed Retirement Credits

Once you pass your FRA, delaying your Social Security withdrawal will begin to accrue benefits.

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Each month of delay (if you were born after 1943) will add around 0.67% per month, from your FRA until you reach 70 years of age.

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Delaying in this way could see your monthly withdrawal be around 24% higher. Therefore, waiting until 70 to withdraw your Social Security is how to get the most of your money. After the age of 70, all benefits are capped.

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When is the best time to withdraw Social Security?

On paper, the best time to withdraw Social Security is 70. This is so you can take advantage of the Delayed Retirement Credits, and withdraw a maximum of 124% of your owed amount. 

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But in reality, the best time to withdraw Social Security is when it’s best for you personally. Your retirement is unlikely to be a straight line, and you will have a unique situation that needs to be considered.

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You should take into account factors such as:

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• Your life expectancy and health
• Your financial situation and cash flow needs
• Your family’s needs
• Your other potential retirement incomes
• The unpredictability of the markets

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Those with a shorter life expectancy will likely want to take out Social Security earlier. You might also have plans for retirement that you want to get started with earlier rather than later. If you work a particularly demanding, or even hazardous job, then your life expectancy could even benefit by taking early retirement.

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If you are married or partnered, you should also consider your partner’s Social Security or retirement plans as part of a wider strategy. If you are older, then it could make sense to withdraw your Social Security first, to then withdraw your partner’s later.

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As Social Security likely won’t be the only source of income for you, it’s important to take into account the benefits of early withdrawal, as well as the benefits of delayed withdrawal. Optimal Social Security timing is a complex decision to make, and you must weigh up all your finances as well as your personal life in order to make a decision.

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Conclusion

Deciding when to retire can be tough, but at Brindle & Bay, we can help ease the pain of this decision.

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Our team of professionals will review your specific needs, take into account all factors in your financial situation, and help you find the best time to withdraw and also retire.

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If you’re unsure about what might be the best time for you, you can book a free consultation with us on our website.

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