Three Reasons to Delay Taking Your Social Security Benefits
Holding Off on Your Benefits May Pay Off in the Long-Term| By: Randall E. White, CFP®, RICP®, CRPC®, CMFC®
If you’re like most retirees, you may be planning to claim your Social Security benefits around the age of 62. Or, perhaps, you plan to hold off a bit longer until you’ve finally hit full retirement age, which is typically between the ages of 66 and 67. However, have you considered waiting even longer – until age 70 – to begin collecting Social Security?
The truth is, there are quite a few benefits that could come from being patient. Here are three main reasons why it may pay in the long run to delay taking your Social Security benefits until age 70.
#1. Your Monthly Check Will Increase
If you find yourself unable to wait to begin claiming your Social Security benefits and begin collecting before you hit full retirement age, you can be penalized. Your benefits could end up being permanently reduced by up to 30% of what you could have received had you have waited.
Not only that, but if you wait until after you’ve hit your full retirement age, you not only avoid being penalized, you also get rewarded. For those who wait, Social Security adds a delayed retirement credit of 8% to your monthly payout for each year you hold off.
Now, 8% might not seem like a lot at first glance. However, that’s a guaranteed return of 8% per year of your deferral which is most likely more than you’ll receive from any other current fixed products. Additionally, an 8% rise in your monthly check is more than the annual 1.5% cost of living adjustments (COLAs) that Social Security beneficiaries have been seeing recently.
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This means that by waiting to claim your Social Security benefits, you’ll ultimately find yourself collecting more than if you had started earlier. And, since COLA increases aren’t guaranteed to accurately match the cost of inflation, you’ll be better protected from inflation.
#2. Your Tax Bill Will Decrease
One of the biggest mistakes people make when it comes to planning for retirement is that they don’t accurately prepare for how much they’ll have to pay in taxes. When it comes to your Social Security benefits, you could end up paying federal income taxes on as much as 85% of your benefits if you don’t plan when to claim them correctly. That’s a lot of money leaving your pocket and going back to the government!
It all depends on how high your provisional income (adjusted gross income + nontaxable interest + half of your Social Security benefits) is when you’re filing your federal tax return. If you’re filing as an individual and your provisional income is between $25,000 and $34,000, or if you’re filing jointly and your provisional income is between $32,000 and $44,000, then chances are you’ll be paying taxes on up to 50% of your Social Security benefits.
You may find yourself paying federal income taxes on up to 85% of your benefits if you’re a single filer and your provisional income is higher than $34,000. In that case, you may find yourself paying taxes on up to 85% of your benefits. For couples, the threshold is a provisional income of greater than $44,000.
This is why waiting until you retire may be the smartest move. If you don’t have as much taxable income, then your provisional income will be lower, thereby potentially saving you from having to pay federal income taxes on your benefits.
However, there are still some things to be aware of. For most Baby Boomers, a significant amount of their retirement savings is in tax-deferred IRAs or 401(k)s - both of which carry the threat of a substantial federal income tax bill. Because of this, you may want to think about taking distributions from those accounts earlier in your retirement and looking into making some savvy conversions into accounts that can provide you with a tax-free income. This not only helps you mitigate your tax bill, but it can also provide you an opportunity to delay claiming your Social Security benefits until later in life when your benefits have a chance of not being taxed at all.
This can be a complicated process that requires a deep knowledge of retirement savings accounts and tax law, so it can be beneficial for you to work with a qualified financial and tax professional to develop a strategy that works best for your unique financial situation and long-term goals.
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#3. You Want Your Benefits to Last Your Entire Retirement
One of the most critical parts of building a Social Security strategy is considering how long you expect your retirement to last. While none of us can know for sure how much time we have left on this Earth, the average life expectancy for Americans continues to rise. This means that retirees may have to plan to spend more time in retirement than their parents or grandparents did.
Because you can take advantage of higher monthly benefits if you wait until 70 to collect Social Security, and potentially save a significant amount in taxes, you increase the chance that your benefits will be able to support you for your entire retirement.
Patience Pays Off
Ultimately, everyone’s perfect retirement plan is going to look different because no two people’s situations are the same. However, there are some very real benefits that come along with delaying your Social Security benefits that should be taken into consideration when you’re developing your Social Security strategy.
Our team at TriCapital Wealth is dedicated to helping you build a comprehensive plan for your financial future that can give you greater confidence. If you’d like to talk with one of our financial planning professionals about you Social Security strategy, please contact us today.
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.