Social Security election decision(s) are a foundational component of a comprehensive retirement plan. The decision of when to claim Social Security is a top concern for pre-retirees and for good reason: Claiming too early and locking in a lower payment can prove to be a mistake for people who experience longevity, while delaying in order to secure a higher payment, then meeting an early demise, can leave money on the table.
Assuming you live to the average life expectancy, you’ll receive roughly the same total dollar amount whether you start claiming at age 62, age 70, or any time in between. But for those of us without a crystal ball to predict the exact moment of our death, the decision is multifaceted.
Deferring Social Security income can have several significant benefits for retirees. Here are a few:
Increased Monthly Benefits – Guaranteed
You can elect to claim Social Security benefits as early as age 62, or as late as age 70. The longer you delay claiming Social Security benefits, the higher your monthly benefit will be for the remainder of your life. For each year you defer claiming benefits beyond your full retirement age, you will receive a “delayed retirement credit” of 8% up until age 70. This can result in a significant increase in your monthly benefit.
The chart below shows how the annual benefit amount can change for a retiree who is eligible to receive $24,000 per year at the full retirement age (FRA) of 66. Deferring Social Security income from age 66 until age 70 results in a guaranteed 32% increase in income.
Long-Term Financial Security
The biggest concern of most retiree’s is the fear of outliving their savings. Delaying Social Security benefits can provide long-term financial security, particularly if you live longer than expected. By deferring benefits, you can ensure a higher monthly benefit throughout your retirement years, which can help cover living expenses and unexpected costs.
Life expectancy is a critical factor in Social Security planning. Of course, no one can predict how long they will live, but if you expect to live a longer than average life, deferring Social Security benefits can help you maximize your lifetime benefits. Waiting to claim benefits can help ensure that you receive the maximum amount of benefits over the course of your lifetime.
Potential Increased Spousal and Survivor Benefits
If you are married, there are Spousal and Survivor provisions to consider in making your respective Social Security election decisions. Deferring Social Security income – especially for the higher income earning spouse – can be even more beneficial in maximizing your cumulative, comprehensive benefits.
Social Security Spousal benefits are benefits paid to the spouse of a worker who is eligible for Social Security retirement benefits. The spousal benefit is designed to provide retirement income to the non-working or lower-earning spouse of a Social Security beneficiary.
Spousal benefits can be up to 50% of the primary worker’s Social Security benefit amount and they can be an important source of retirement income for married couples.
Social Security Survivors benefits are paid to widows, widowers, and dependents of eligible workers. The benefit amount for the survivor is based on the amount of earnings of the person who died. For surviving spouses full retirement age or older this is 100% of the deceased worker’s benefit amount. Deferring Social Security income and maximizing one’s benefits can help provide additional financial security for a spouse in the event of your death.
Given the Social Security Spousal and Survivor income provisions, it is especially important for couples to carefully consider their options and the timing of when they file for Social Security retirement benefits, in order to maximize their collective benefits.
Potential Tax Savings
Many people are unpleasantly surprised to realize they could end up paying federal income tax on up to 85% of their Social Security benefits. Taxation of Social Security Income
While Social Security becomes taxable once your total income exceeds the annual limit, even at its highest inclusion in taxable income, only 85% of the benefit is taxed. This means that if you delay Social Security while spending down and/or performing Roth conversions of pretax retirement accounts throughout your 60s, you’ll likely be reducing your future required minimum distributions (RMDs), which are 100% taxable, and replacing that income in your 70s and beyond with lower-taxed Social Security benefits.
Your Social Security election decision(s) should be made in coordination with a comprehensive tax-efficient retirement plan. A strategy of deferring Social Security income to enable the maximization of Roth conversions early in retirement can result in substantial tax savings over one’s lifetime.
Social Security benefits are adjusted for inflation each year for all current beneficiaries of the program. While the percentage cost-of-living adjustment (COLA) increase is the same for all beneficiaries, the actual dollar amount is based upon your benefit. Delaying benefits results in a higher starting point for those adjustments, providing greater inflation protection over time.
For example, using a COLA increase of 6.0%, a person receiving $24,000 per year will receive a $1,440 per month increase, while someone whose benefit is $31,680 will see a $1,900 per year increase. Those increases compound over the years – in other words, delaying Social Security benefits not only allows you to lock in a higher starting base income amount, but the COLA dollar increases each year of your life will be larger as well.
With it’s guaranteed 8% annual return, annual cost of living adjustment (COLA), and the backing of the US government, there is no better “financial product” on the market than Social Security. Assuming your retirement investment accounts aren’t invested as aggressively as they may have been during your earlier years, many retirees are probably better off deferring their Social Security benefits, even if it means spending down a portion of their retirement savings to bridge the income gap in retirement.
However, it’s important to recognize that deferring Social Security benefits may not be the right choice for everyone. There may be reasons why it’s better to claim Social Security benefits earlier, such as immediate financial need or health concerns. It’s a personal decision that should be based on your individual circumstances and financial goals. You should carefully consider your individual circumstances and develop a comprehensive retirement plan, of which your Social Security claiming decision(s) should be a foundational component.
Paul Staib | Certified Financial Planner (CFP®), MBA, RICP®
Paul Staib, Certified Financial Planner (CFP®), RICP®, is an independent Flat Fee-Only financial planner. Staib Financial Planning, LLC provides comprehensive financial planning, retirement planning, and investment management services to help clients in all financial situations achieve their personal financial goals. Staib Financial Planning, LLC serves clients as a fiduciary and never earns a commission of any kind. Our offices are located in the south Denver metro area, enabling us to conveniently serve clients in Highlands Ranch, Littleton, Lone Tree, Aurora, Parker, Denver Tech Center, Centennial, Castle Pines and surrounding communities. We also offer our services virtually.
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