The US government is not hiding that the longer you wait to collect Social Security, the more money you raise. In fact, the concept is quite simple.
This is the deal, straight from the US Social Security Administration.
If you start to receive a pension at age. . .
- 67, you will receive 108% of the monthly benefit because you have been granted a postponement of the benefit for 12 months.
- 70, you will receive 132% of the monthly benefit because you have been granted a postponement of the benefit for 48 months.
Rejecting that windfall seems at odds with income accrual in retirement, an issue usually close to the heart of retirees.
Yet that is what Americans routinely do. Only 5% of male retirees in the US and 7% of female retirees start taking Social Security at age 70, when benefits are highest, the SSA reported.
The SSA also notes that approximately half of all retirees receive Social Security benefits before full retirement age and a quarter (25%) receive their benefits at the age 62, when withdrawal amounts are significantly lower than at age 67 or 70. .
Why wait? Americans have their reasons.
Why do so few Americans wait until age 70 to collect Social Security? Just as importantly, do they know that they are missing out on significant takeout dollars from Social Security?
Those issues may not matter, investment experts say.
“Some people have no choice,” said Jay Zigmont, founder of Childfree Wealth, in Water Valley, Miss. “For example, anyone who claims disability insurance cannot defer collection due to SSA rules.
“In addition, other recipients are forced to retire for various reasons and must apply for benefits before age 70.”
While some American seniors fully understand how much money they’re losing by taking Social Security early, mistakes have already been made in retirement savings, and those recipients can’t help but cash in on Social Security early.
“Most retirees probably understand the loss,” said Paul Tyler, chief marketing officer at Nassau Financial Group in Hartford, Connecticut. “However, far 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 are:
— Not anticipating earlier than planned retirement from their jobs.
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— Don’t start cutting back and selling a house in a declining market sooner.
— Not looking for ways to use their retirement savings to create a protected income stream until they turn 70.
Your financial picture matters when accepting payouts
Many Americans time their Social Security withdrawals based on personal needs, and that’s generally the right move to make at any age.
“For example, if you receive Social Security at age 62, the break-even point is to wait and start taking Social Security at full retirement age, when you are about 80,” said Melissa Shaw, an asset manager at TIAA. “If you don’t have a long life expectancy, it may also make sense to start taking out social security funds as early as possible.”
For married couples, it may make sense to let the highest-income earner wait until age 70 to take full advantage of the benefits.
“Normally, when one of the spouses dies, the surviving spouse loses some of the Social Security income, but if the earner with the highest income maximizes their benefits, the surviving spouse keeps the higher Social Security income,” said Shaw.
The withdrawal rate from your portfolio while deferring Social Security taking is also important. “If you can keep the withdrawal rate of your retirement savings below 4%, you should postpone Social Security for as long 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 the other sources of income you need to meet your spending needs.
“For example, if you retire at age 67, you need to have other resources that can meet your needs and whether or not you receive Medicare benefits,” said Colleen Carcone, director of wealth planning strategies at TIAA.
“If you decide to delay retirement and claim Social Security if you are over 65, you should consider applying for Medicare in a timely manner or you could be fined too late.”
There is also an annoying tax called the Social Security torpedo that affects the Social Security withdrawal phases.
“If you’re middle-income and pay for your retirement by filing for Social Security rather than drawing on your retirement funds, you may be paying significantly more income tax than if you had reversed the order,” said Steve Parrish, co-director of the fund. Center for Retirement Income at The American College of Financial Services.
In other words, pull up your IRAs and other retirement savings first and wait until later to apply for Social Security. In some situations, it can mean the difference between paying 0% on 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 pleasant to think about, if you start collecting benefits earlier, you’ll receive a smaller benefit for longer,” Carcone said. “If you start with benefits later, you take out a larger benefit for a shorter period of time.”
“The most important thing is that you meet a financial advisor,” added Carcone. “A financial advisor can help you decide how best to structure retirement income so that you can meet your income needs.”