When should you collect Social Security?

It's kind of a trick question.

There are a few realities about retirement. One, you probably can’t plan for it as well as you like, because employers can be fickle. Two, in the quest to give people flexibility, the government has added a lot of complexity to the system. And three, we all face one great unknown: how long we are going to live.

Your Social Security account is similar to an annuity. The annual benefit is a function of how much money you earned and how many payments you are expected to receive. That expected number of payments is based on when you retire and the life expectancy for someone of the same age and sex. You can start collecting Social Security at age 62. The monthly payment will increase between age 62 and age 70, not because you get more money in total, but because your payment is based on the number of payments you expect to receive.

(If you divide $100,000 by 10, then you have 10 payments of $10,000 each. If you divide $100,000 by 8, then you have 8 payments of $12,500 each. Either way, you’re dividing up $100,000.)

If you work between ages 62 and 70, you’ll continue to pay into the Social Security system and that may increase your benefit further. If you aren’t working, it won’t matter.

There is a number for “full retirement age”, currently 67 for everyone born after 1960. It doesn’t affect the benefits calculation, but it does affect some other things like penalties for additional income.

You don’t have to take Social Security at age 70, but after that point, your benefit amount is frozen.

Once you stop working, I’d argue that you should take Social Security, then invest the money that you don’t need. Of course, that assumes that you won’t spend all the money and that you are a wise investor rather than a bull-market genius. While the financial markets often offer a better return than Social Security, they carry far more risk. On a risk-adjusted basis, Social Security isn’t a bad investment for most people.

Of course, there’s an equally good argument that because Social Security is a no-risk investment and your personal savings have risk, you should spend your savings first, then take Social Security.

However, if you need the money: take Social Security. I’ve occasionally seen people tie themselves up into knots while waiting to maximize their Social Security benefits, when they could really use the smaller amount now.

What you can’t do is take Social Security and work a lot. Here are the terms:

• If you are under full retirement age, your benefit payments will be reduced by $1 for every $2 you earn above the annual limit. For 2024, that limit is $22,320.

• In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn above a different limit, currently set for $59,520 for 2024. This is only for earnings up to the month before you reach your full retirement age, not your earnings for the entire year.

Both of those are, in essence, tests of whether you are fully retired or not. Once you turn full retirement age, you can work and receive benefits no matter how much you make, and your benefits may increase based on your earnings for those additional years of work.

What about government pensions?

The US Constitution limits the ability of the federal government to dictate what state and local governments do. As long as it’s not unconstitutional, they can more or less do as they please. Because Social Security is a federal program, state and local governments were able to opt out of it. Many did. In hindsight, that was probably the wrong decision, but here we are.

Most state and local pensions pay richer benefits than Social Security because they were designed to replace both Social Security and an employer pension. (Most private sector employers later did away with pensions, but they usually offer other types of retirement benefits like 401(k) plans.) I am in the Illinois State University Retirement System (SURS) from my years teaching at University of Illinois at Chicago. I’m in a self-directed plan, so I can choose the investments. When I decide to retire, the balance will be converted to an annuity that pays a monthly benefit.

But remember how I said that part of the pension is a replacement for Social Security? Because of that, my Social Security benefits will be reduced by 2/3 of the amount I receive from SURS. In my case, I will almost certainly receive some Social Security benefits in addition to my SURS payment. But I was a part-timer for 15 years. This Social Security benefits offset means that many full-time, full-career government employees will not receive Social Security, even if they are otherwise eligible through their spouse or from part-time gigs. No double dipping!

I hope that clears up some questions. Do you have other questions or observations? If so, let me know in the comments.