As you approach retirement, you’ll need to figure out what makes sense for you in terms of applying for Social Security retirement benefits. In some cases, delaying your benefits can result in receiving more money each month. Before you decide that this seems like a good idea, though, you should consider your situation and evaluate your options.
WHEN CAN YOU START RECEIVING SOCIAL SECURITY?
Many soon-to-be retirees and recent retirees look at the earliest they can take Social Security without considering the full implications. It’s true that you can begin your retirement benefits at age 62, but you’ll probably be taking a cut in your monthly payments.
The Social Security Administration (SSA) bases your monthly benefit payment on whether or not you have reached “full retirement age.” Currently, for those born after 1960, full retirement age is 67. Those born in 1937 or earlier reach full retirement age at 65. For those born through 1938 and 1959, there are monthly gradations of when you reach full retirement age. Before you begin any calculation about when to start taking Social Security, you need to determine when you will reach your full retirement age.
REDUCTION OR INCREASE IN MONTHLY PAYOUTS?
Your Social Security payout will be based on how much you’ve earned during your working years. The SSA looks at your average “indexed” monthly earnings during the 35 years in which you earned the most money.
The retirement benefit can be adjusted on whether or not you delay receiving your Social Security. If you start receiving Social Security payments at age 62 – before you reach full retirement age – your monthly benefit will be lower than your earnings suggest. If you wait until full retirement age, you will receive your “full” amount.
If you are willing to put off receiving your benefits for a few more years, though, you could see higher monthly payments.
In fact, delaying the receipt of your Social Security benefits beyond your full retirement age results in what are known as Delayed Retirement Credits. You receive delayed credits at a rate of ⅔% for each month you delay. This amounts to about 8% for each full year that you delay, up to age 70. If your full retirement age is 67, you could see an increase of 24%.
For someone expecting $1,000 a month from Social Security at the full retirement age of 67, delaying until age 70 could mean a monthly retirement benefit amount of $1,240. It’s important to understand that your credits stop accruing at age 70, no longer how long you delay, so delaying beyond age 70 might not make sense.
IS IT WORTH DELAYING SOCIAL SECURITY BENEFITS?
While it feels as though you are getting more money when you delay, the reality is that you are still getting what you are entitled to. You might receive more each month once you start receiving benefits, but that’s only because the SSA didn’t need to pay anything to you during the years you delayed. Unless you live a couple decades longer, delaying won’t result in much more money overall.
When making the decision to delay Social Security benefits, you should consider your overall financial picture and your tax situation with other retirement accounts. Your mix of tax-advantaged retirement accounts can make a difference because Social Security benefits are taxable. Some of your considerations should include:
- Your eligibility to withdraw from 401(k) and IRA accounts at age 59 ½.
- The impact withdrawals from a tax-deferred account have on your tax bracket and how that combines with your Social Security income.
- Required Minimum Distributions from most tax-advantaged retirement accounts (Roth IRAs don’t have RMDs) starting at age 70 ½.
- The way you use your Health Savings Account since the money can be tax-free if used for qualified expenses, or tax-deferred if used as another IRA after age 59 ½.
Depending on your situation, it might even make sense to start taking Social Security at age 62, even though it means a reduction in your monthly benefit amount. A retirement planning expert can help you work through different income and tax scenarios in order to determine the best order to withdraw from your retirement accounts and coordinate that plan with your Social Security benefits.