At a certain point in our adult working lives, we set a countdown to retirement. And the clock is ticking for those nearing 62—the age at which you can start collecting Social Security benefits. By now, you’ve long been diligently investing and preparing for retirement. Still, as the big day approaches, one of the most important decisions you have to make is whether to collect immediately or wait until you’ve reached full retirement age (FRA). And, will it make a difference if you delay?
As with most of your financial plans, it depends. Claiming your benefits earlier could provide enough income to delay drawing from your portfolio, allowing it more time to grow. Likewise, waiting until FRA or later will result in at least 30% higher benefits. But these decisions will come down to your goals and the lifestyle you want to enjoy in retirement. Not to mention your immediate financial needs.
Can You Afford to Delay?
Thanks to the flexibility built into the collection of Social Security, you can choose exactly when you’d like to start receiving benefits. That is, deciding to collect benefits beginning at age 62 or delaying until you reach FRA (66 years old for many, but 67 for those born in or after 1960) or later.
Before deciding, consider these questions:
- Will the benefits of immediate cash flow outweigh the advantages of waiting?
- Do you have an immediate need for the money?
- Do you plan to continue working in some capacity?
- How is your physical and mental health?
Even for those who have meticulously prepared for retirement, Social Security benefits matter, and their timing is essential. So, let’s discuss four advantages in favor of delaying your Social Security benefits.
#1: To Maximize Benefits
Those who take their benefits at age 62 will face early filing penalties and a substantial reduction in benefits compared to those who wait. Sure, they’ll technically receive more checks in their lifetime, but each check will be for less than if they had deferred. Alternatively, those who wait will receive fewer but fuller checks. So if there is no immediate need for the money, delay and claim more later. The Social Security Administration will add a delayed retirement credit for each year you postpone your benefits until age 70. That’s a generous increase of 8% per year.
If you decide to wait a few years to maximize the potential for a more significant lifetime benefit, make sure you have alternative income resources (like a 401k, IRA, private pension, earnings from work, or personal savings).
#2: To Avoid Losing Benefits
Working, even part-time, in retirement can contribute to your income and mental well-being while offering flexibility and freedom. However, if you work and collect Social Security benefits before FRA, you might exceed the annual earnings limit, reducing your benefit. This is especially important for those working in a high-income tax bracket. This limit does drop off at full retirement age, but Social Security income may still be taxable up to 85%.
Also important to note—if you’re the higher earner in your family, deferring benefits as long as possible can secure better benefits for your spouse after your death. A surviving spouse is entitled to claim the higher benefits in the household.
#3: Because We’re Living Longer
No one can predict how long they’ll live, but we’re all living longer these days. And if you don’t want to outlive your money, why not wait for the highest possible payment? Social Security benefits are guaranteed for life, so if you want to max out your monthly income, waiting to claim benefits is the best choice.
#4: To Reduce Your Tax Bill
Many people aren’t aware that they may pay taxes on as much as 85% of their Social Security income. And if most of your retirement income is from tax-deferred IRAs or 401ks, your tax bills could be substantial. Sure, all that tax deferral seemed wise at the time, but you don’t want to be left with an unwanted tax burden in retirement. To offset this, it would be wise to convert tax-deferred assets into future tax-free income now so that your Social Security benefits may not be taxed later.
So, Is Waiting Always the Right Answer?
Those who wait will receive higher monthly checks, which could result in higher lifetime benefits depending on you or your spouse’s life span. It helps protect your financial security in the case of living longer. But determining your timeline for claiming Social Security is personal and complex. Sure, deferring the income stream from Social Security until FRA offers benefits, but what’s right for one person won’t be suitable for everyone.
Social Security was conceived to provide security in retirement. Think carefully about your health (and family history), your desire to consider working in retirement, and the amount of income your lifestyle will require before making this decision. Also, consider your other retirement assets. If, after reviewing all factors, you decide to claim your benefits before age 70, good for you! Enjoy your retirement, and don’t feel bad about not waiting.
If you are seeking advice on the best plan for you, reach out. At Uncommon Cents Investing, we’ll provide guidance to help you achieve your goals, and we’ll be here cheering you on as you reach them!