The US government makes no secret of the fact that the longer you wait to collect Social Security, the more money it will collect. In fact, the concept is quite simple.
Here’s the deal, straight from the US Social Security Administration.
If you start receiving retirement benefits at age . . .
- 67, you will get 108% of the monthly benefit because you delayed getting benefits for 12 months.
- 70, you will get 132% of the monthly benefit because you delayed getting benefits for 48 months.
Rejecting that windfall seems contrary to accumulating income in retirement, a subject often near and dear to a retiree’s heart.
Yet that is what Americans routinely do. Only 5% of retired US men and 7% of retired women start receiving Social Security at age 70, when benefits are highest, the SSA reported.
The SSA also notes that about half of all retirees receive Social Security benefits before full retirement age and a quarter (25%) receive their benefits on the trigger date of age 62, when the amounts of retirement are significantly lower than at age 67 or 70.
Why wait? The Americans have their reasons.
Why do so few Americans wait until age 70 to collect Social Security? Just as important, do they know they’re missing out on a significant amount of Social Security takeout money?
Those problems may not matter, investment experts say.
“Some people don’t have a choice,” said Jay Zigmont, founder of Childfree Wealth, in Water Valley, Mississippi. “For example, anyone applying for Social Security Disability Insurance will not be able to delay collection, due to SSA rules. .
“In addition, other beneficiaries are pushed into involuntary retirement for a variety of reasons and need to claim benefits before age 70.”
While some older Americans may fully understand how much cash they’re losing by collecting Social Security early, mistakes have already been made with retirement savings, and there’s nothing those beneficiaries can do about it except collect. Social Security ahead of time.
“Most retirees probably understand the loss,” said Paul Tyler, director of marketing for Nassau Financial Group in Hartford, Conn. “Yet too many people paint themselves in a financial corner late in life. Consequently, they feel they have no choice but to apply early.”
What did they forget to do? According to Tyler, some of the common mistakes include:
— Not anticipating retirement earlier than planned from their jobs.
— Don’t start downsizing early and sell a home in a down market.
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— Not looking for ways to use your retirement savings to create a protected income stream until you turn 70.
Your financial picture is important when receiving payments
Many Americans time their Social Security withdrawals based on their personal needs, and that’s usually the right decision at any age.
“For example, if you start receiving Social Security at age 62, the break-even point to wait and start Social Security at full retirement age is around age 80,” said Melissa Shaw, TIAA wealth manager. . “If you don’t have a long life expectancy, it may also make sense to start drawing funds from Social Security as soon as possible.”
For married couples, it may make sense for the person with the highest income to wait until age 70 to maximize benefits.
“Generally, when one spouse dies, the surviving spouse will lose some Social Security income, but if the person with the higher income reaches their benefit maximum, the surviving spouse will keep the higher Social Security income,” Shaw said.
The rate of withdrawal from your portfolio while you delay receiving Social Security is also important. “If you can keep your retirement savings withdrawal rate below 4%, you should delay Social Security as much as possible,” Shaw added.
Additional factors in the mix
In general, you should consider a number of factors when deciding when to claim benefits, such as what other sources of income you have to meet your spending needs.
“If you retire at, say, 67, you need to have other resources that can meet your needs whether or not you’re receiving Medicare benefits,” said Colleen Carcone, director of estate planning strategies for TIAA.
“If you decide to delay your retirement and claim Social Security when you’re over 65, be sure to consider applying for Medicare in a timely manner or you may be subject to late filing penalties.”
There’s also a nasty tax known as the Social Security tax torpedo that affects Social Security’s retirement stages.
“If you’re on a median income and you pay for your retirement by filing for Social Security instead of using your retirement funds, you may end up paying significantly more income taxes than if you had reversed the order,” said Steve Parrish. , co-director of the Retirement Income Center at the American College of Financial Services.
“In other words, take out your IRAs and other retirement savings first and wait to apply for Social Security until later. In some situations, it can mean the difference between paying 0% of your Social Security benefits and paying income tax on 85% of your benefits.”
It is also vital to consider your own mortality.
“While it’s not pretty to think about, if you start collecting benefits sooner, you’ll get a lower benefit for longer,” Carcone said. “If you start collecting benefits later, you will get a higher benefit for a shorter period of time.”
“The most important thing is to meet with a financial advisor,” added Carcone. “A financial advisor can help you decide how best to structure retirement income so he or she can meet your income needs.”