Deciding when to start taking Social Security benefits is a critical aspect of retirement planning that can significantly impact your financial security. While eligibility begins at 62, delaying until age 70 can substantially boost your monthly benefit amount, offering greater stability in retirement income.
Social Security forms a fundamental pillar of retirement finances. You pay into Social Security during your working career. Social Security is indexed for inflation and offers some hedging against two major risks you will face in retirement: longevity risk, or the risk of outliving your money, and inflation risk, which can compromise your purchasing power over time.
If these risks are not adequately addressed in your retirement planning process, they could undermine your retirement plan and compromise your quality of life in your old age. Integrating Social Security into a broader retirement strategy alongside pensions and personal savings is essential for sustaining your desired lifestyle and financial independence throughout retirement.
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When optimizing your retirement income plan, you must view the Social Security timing decision beyond merely a break-even analysis. From that perspective, most people must live to age 78 or 79 in order to justify delaying the benefits until age 70.
Alternatively, I believe Social Security may be viewed as longevity insurance. In this context, you may decide to delay benefits “'in case”' you live for a very long time. With more people eating better and exercising, and with continued advances in health care, many people will reach the age of 100 and beyond. As life expectancies increase, Social Security may be a key element in protecting you and your spouse from outliving your money.
Benefits of delaying Social Security
As per the January 2024 Social Security Administration publication, delaying Social Security retirement benefits beyond your full retirement age can significantly enhance monthly benefit amounts. The increase is calculated based on birth year and the length of deferral, with benefits growing by approximately 8% annually (or two-thirds of 1% per month) until age 70.
According to the same Social Security Administration publication, individuals born before 1955 opting to start benefits at age 70 can receive up to 132% of their monthly benefit, compared with the amount at their full retirement age. those born in 1955 or later would see a bit less of a boost — from 130.7% to 124% — but that’s nothing to sneeze at. Assuming that you live beyond your break-even age, this strategic delay can substantially enhance your lifetime retirement income, providing a robust financial safety net against longevity risk.
Moreover, delaying benefits increases the base upon which your annual cost-of-living adjustment (COLA) is applied. Essentially, each year that the Social Security Administration offers an inflation enhancement to retirees, your benefits will increase by a greater dollar amount because your payment base is higher.
An additional consideration is your spouse. When you pass away, your spouse is eligible to receive the greater of your enhanced benefits or continue with their own. By delaying benefits and having those benefits compound to a greater degree with inflation, a retiree can offer increased survivor benefits for their spouse, providing greater financial security for surviving partners.
Potential drawbacks in delaying Social Security
While waiting to claim Social Security could offer compelling advantages, it may not suit everyone's financial strategy or life circ*mstances. Delaying benefits may lead to the depletion of other retirement assets earmarked for inheritance. Furthermore, the tax implications of accessing retirement funds, such as those held in a 401(k), can affect overall retirement income.
Unlike Social Security payments, which are taxed more advantageously, withdrawals from retirement accounts are fully taxable at ordinary income tax rates. It's crucial to evaluate all tax-related factors when establishing an optimal retirement income plan.
Emotional and health factors to think about
Emotional comfort and health considerations also play a role in the decision to delay Social Security benefits. Some individuals prioritize immediate financial support, especially if health concerns or the desire for a stress-free retirement are important to them. Balancing emotional well-being with long-term financial security is essential when making decisions about Social Security timing.
Market volatility and uncertainties surrounding the future of the Social Security program are also crucial considerations. Liquidating investments during market downturns to compensate for
delayed benefits could negate the financial benefits of waiting. Moreover, potential changes to Social Security's structure could further complicate decision-making.
Making an informed decision
A well-informed decision on Social Security timing requires a holistic understanding of the intricate balance between current financial needs, future income security, and overall well-being. Claiming Social Security early — before your full retirement age — results in a permanent reduction in benefits, along with potential penalties if you keep working and your earnings exceed certain thresholds.
The decision also involves considering health insurance implications, particularly regarding Medicare. Individuals must apply for Medicare within three months of their 65th birthday to avoid late-enrollment penalties for Medicare Part B and Part D. This step is crucial to ensure continuous health coverage without incurring unnecessary costs. For those who apply for Social Security before age 65, enrollment in Medicare Parts A&B will be automatic once you turn 65. For those delaying benefits past that age, they must remember to apply for Medicare to avoid unnecessary penalties.
Ultimately, the decision to postpone Social Security benefits is deeply personal and requires a nuanced evaluation of health, financial landscape, taxes, other available resources, and retirement objectives. Striking the right balance between immediate needs and long-term financial security is essential for a stable and comfortable retirement. By weighing the advantages and challenges of delaying benefits, retirees can make informed choices that pave the way for a secure and fulfilling retirement.
Antwone Harris, MBA, CFP®, is Chief Planning Strategist at Platinum Bridge Wealth Strategies in Washington, D.C. His firm focuses on retirement income planning for professionals in or near retirement. Prior to launching Platinum Bridge Wealth Strategies in 2017, he spent 12 years as a VP - Senior Financial Consultant with Charles Schwab Inc. Investment advisory services offered through Osaic Advisory Services, LLC (Osaic Advisory), a registered investment advisor. Osaic Advisory is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Advisory. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this article ay not reflect the views of Osaic Advisory Services, LLC.
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