People who are eligible for Social Security retirement benefits may start receiving benefits anytime between ages 62 and 70. However, people who start receiving benefits before their full retirement age, which is 65 to 67 depending on year of birth, will see their monthly benefits permanently reduced, and people who delay receiving benefits past their full retirement age will see their monthly benefits permanently increased. This trade-off causes many people to question when is the optimal age to start receiving benefits. The following are a few aspects to consider before deciding when to start receiving Social Security retirement benefits.

Life Expectancy
Assuming everyone lives to the same age, people who begin receiving Social Security benefits at younger ages will collect a lower monthly benefit for more years, and people who begin receiving Social Security benefits at older ages will collect a higher monthly benefit for fewer years. While we know not everyone has the same life expectancy, the Social Security Administration (SSA) attempts to predict what the average age of death will be for people depending on their gender and current age. You can find the average life expectancy for a person of any age on the SSA website. The SSA considers the average life expectancy age to be the break-even point for the total lifetime benefits a person will receive. So theoretically, a person will have received the same total lifetime benefits at his or her life expectancy age, regardless of which age he or she began receiving benefits. People who feel they will live more or less years than the average life expectancy should let that influence their decision of when to start receiving benefits. People who will die before the average person their age may want to start receiving benefits at an earlier age, and people who will live longer than the average person their age may want to delay receiving benefits until a later age.

Investment Return
Once a person starts collecting a Social Security retirement benefit, that monthly benefit amount is locked in for life with an increase only for cost-of-living adjustments when determined by the SSA. For every month a person starts receiving Social Security benefits before his or her full retirement age, the benefit amount is reduced by a certain percentage, and for every month a person delays receiving Social Security benefits after his or her full retirement age, the benefit amount is increased by a certain percentage. You can find the percentage adjustment for a person of any age on the SSA website. The percentage increase or decrease may be considered favorable or unfavorable compared to a person’s expected investment return. If the percentage increase or decrease of the monthly benefit is less than a person’s investment return, he or she may may want to start receiving benefits at an earlier age and invest the benefits for a return greater than the SSA adjustment. If the percentage increase or decrease is more than a person’s investment return, he or she may want to delay receiving benefits until a later age because the SSA adjustment will provide a greater return than investing the benefits.

Employment Status
People who are still working and earning income do not usually benefit from starting to receive Social Security benefits before their full retirement age. Not only do they receive a reduced benefit by starting at the earlier age, but the SSA imposes an additional penalty by reducing their monthly benefit by $1 for every $2 of income they earn above $14,160 per year (limit adjusts for inflation). People who are working often have higher incomes and higher marginal tax rates before retirement than they will have after retirement. Social Security benefits are counted as part of taxable income, so some people may not want to receive benefits during their working years when they are paying income taxes at higher marginal rates. In some cases, starting to receive benefits while continuing to work may push them into higher marginal tax brackets. The effect of income taxes on Social Security benefits should be evaluated in conjunction with a person’s after-tax investment return. If income taxes suppress a person’s net investment return to less than the percentage adjustment for delaying Social Security benefits, receiving later may be preferable to receiving early.

We cannot definitively determine the optimal age to start receiving Social Security retirement benefits because the decision is often based on multiple unknowns. We must make assumptions about life expectancies, investment returns, and income taxes. However, we do know the aspects to consider in the evaluation, and we use this information to guide us to the best decision we can make at the time.