The choice of whether to delay taking Social Security benefits or start as soon as you are eligible is a hot-button topic and a question we are asked often. As with all things in financial planning, the answer to this question is it depends.
What are your choices?
- You are eligible to start taking your benefits at age 62. If your financial needs are great right now, this may be a much needed source of income. However, taking Social Security benefits before your full retirement age reduces your benefits by up to 25 percent.
- You can wait until your full retirement age, which is either 66 or 67 depending on your birth year.
- Or, you could delay taking Social Security benefits until age 70 or any time between official retirement age and 70. You then are eligible to receive delayed retirement credits, which runs about 8 percent annually.
If you can delay taking Social Security, you would receive more per month, and thus per year than if you started cashing in early.
So how do you choose?
Although it sounds like a simple choice, there are some individual factors that can affect your decision.
Your life expectancy
If all of your relatives going back for generations died in their late 60s, it might be good to start taking your Social Security benefits as early as you can. If you know you have a life-limiting condition, you may conclude that reaching age 70 would be a long shot.
So it can be advisable to take your benefits sooner since you may have a need for extra finances now. No one knows how long they’ll live, and many people find it difficult to even think about when they’ll pass away. But if all signs point to a shortened lifespan, your financial advisor may be able to help you face your Social Security timing with an open mind.
Psychological factor
Some people in their 60s who may not have a life-limiting condition might feel that they want to get every penny that’s coming to them via Social Security. So why put it off?
For some, the choice to start cashing in early can be a good one, depending upon their level of need and other personal factors. For others, bearing with the discomfort of waiting is worth the extra payout later on.
Greater spousal benefit
Another reason to delay taking your Social Security benefits is that the delayed retirement credits adds up to a greater amount in spousal benefit. Your spouse would receive more income from your Social Security each month if you wait to start drawing on that money. This would provide more financial security for your spouse.
Again, there are personal factors involved since your spouse will also face his or her own decision about when to take their benefits.
Keep in mind that you cannot pass your Social Security benefits beyond your spouse to your children. One of your personal factors may depend on whether or not you have a spouse and whose income and benefits best serve them. It can be a tricky decision so depend upon your financial advisor to help walk you through the various scenarios.
Tax implications
Benefits from Social Security can be taxed. In fact, up to 85 percent of your Social Security benefits could be taxable. This is yet another reason why you might want to delay taking your Social Security benefits well past age 62.
How much these benefits will be taxed is dependent on how much income you have. Delaying your retirement benefits helps to reduce your taxable income. In order to make this decision, you need to understand the specific tax rules related to Social Security.
Your financial advisor can help you with these rules or refer you to a competent CPA to explain the situation.
Future of social security benefits
Of course, we cannot ignore the question of whether or not Social Security will even be around in the future. This question has loomed and spooked many for quite a while now. You may have heard predictions about when Social Security will run out of money, and given that people are living longer, that’s not outside the realm of possibility.
We’re also facing the emotionally- and politically-loaded possibility that changes made to Social Security can alter what you might expect to get in the future. Such a political hot potato is one that not many politicians want to have land in their laps. So we can say with certainty that no one knows the fate and future of Social Security. All we can do is plan and adjust for any eventualities, assisted by our financial advisor.
What should you do?
Looking at all the data and your personal financial situation, you may find yourself among those advised to delay taking Social Security and instead spend some of your personal assets at this time. This is actually a popular choice as people weigh the benefits of getting that extra 8 percent per year.
Social Security is a tremendous benefit. The longer you can delay taking it, the better. You might be able, and willing, to work until age 70. And if that extra 8 percent per year has been adding up until your retirement age, you will have reached an advantageous milestone. If you have a good salary and a good portfolio, you might find yourself quite comfortable waiting until age 70 to get your increased benefits.
However, if you need the money sooner or now, you would be wise to start receiving your benefits. Only you, along with your financial advisor, can make that decision.
Find out more about your options and considerations as to when to start taking your Social Security benefits in our podcast.
And as always, contact us with your questions. This hot button issue is one to look at now, for you and your spouse’s future advantage.
