Deciding when to start taking Social Security benefits is a critical aspect of retirement planning that can significantly impact your financial security. While eligibility begins at 62, delaying until age 70 can substantially boost your monthly benefit amount, offering greater stability in retirement income.
Social Security forms a fundamental pillar of retirement finances. You pay into Social Security during your working career. Social Security is indexed for inflation and offers some hedging against two major risks you will face in retirement: longevity risk, or the risk of outliving your money, and inflation risk, which can compromise your purchasing power over time.
If these risks are not adequately addressed in your retirement planning process, they could undermine your retirement plan and compromise your quality of life in your old age. Integrating Social Security into a broader retirement strategy alongside pensions and personal savings is essential for sustaining your desired lifestyle and financial independence throughout retirement.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When optimizing your retirement income plan, you must view the Social Security timing decision beyond merely a break-even analysis. From that perspective, most people must live to age 78 or 79 in order to justify delaying the benefits until age 70.
Alternatively, I believe Social Security may be viewed as longevity insurance. In this context, you may decide to delay benefits “'in case”' you live for a very long time. With more people eating better and exercising, and with continued advances in health care, many people will reach the age of 100 and beyond. As life expectancies increase, Social Security may be a key element in protecting you and your spouse from outliving your money.
Benefits of delaying Social Security
As per the January 2024 Social Security Administration publication, delaying Social Security retirement benefits beyond your full retirement age can significantly enhance monthly benefit amounts. The increase is calculated based on birth year and the length of deferral, with benefits growing by approximately 8% annually (or two-thirds of 1% per month) until age 70.
According to the same Social Security Administration publication, individuals born before 1955 opting to start benefits at age 70 can receive up to 132% of their monthly benefit, compared with the amount at their full retirement age. those born in 1955 or later would see a bit less of a boost — from 130.7% to 124% — but that’s nothing to sneeze at. Assuming that you live beyond your break-even age, this strategic delay can substantially enhance your lifetime retirement income, providing a robust financial safety net against longevity risk.
Moreover, delaying benefits increases the base upon which your annual cost-of-living adjustment (COLA) is applied. Essentially, each year that the Social Security Administration offers an inflation enhancement to retirees, your benefits will increase by a greater dollar amount because your payment base is higher.
An additional consideration is your spouse. When you pass away, your spouse is eligible to receive the greater of your enhanced benefits or continue with their own. By delaying benefits and having those benefits compound to a greater degree with inflation, a retiree can offer increased survivor benefits for their spouse, providing greater financial security for surviving partners.
Potential drawbacks in delaying Social Security
While waiting to claim Social Security could offer compelling advantages, it may not suit everyone's financial strategy or life circumstances. Delaying benefits may lead to the depletion of other retirement assets earmarked for inheritance. Furthermore, the tax implications of accessing retirement funds, such as those held in a 401(k), can affect overall retirement income.
Unlike Social Security payments, which are taxed more advantageously, withdrawals from retirement accounts are fully taxable at ordinary income tax rates. It's crucial to evaluate all tax-related factors when establishing an optimal retirement income plan.
Emotional and health factors to think about
Emotional comfort and health considerations also play a role in the decision to delay Social Security benefits. Some individuals prioritize immediate financial support, especially if health concerns or the desire for a stress-free retirement are important to them. Balancing emotional well-being with long-term financial security is essential when making decisions about Social Security timing.
Market volatility and uncertainties surrounding the future of the Social Security program are also crucial considerations. Liquidating investments during market downturns to compensate for
delayed benefits could negate the financial benefits of waiting. Moreover, potential changes to Social Security's structure could further complicate decision-making.
Making an informed decision
A well-informed decision on Social Security timing requires a holistic understanding of the intricate balance between current financial needs, future income security, and overall well-being. Claiming Social Security early — before your full retirement age — results in a permanent reduction in benefits, along with potential penalties if you keep working and your earnings exceed certain thresholds.
The decision also involves considering health insurance implications, particularly regarding Medicare. Individuals must apply for Medicare within three months of their 65th birthday to avoid late-enrollment penalties for Medicare Part B and Part D. This step is crucial to ensure continuous health coverage without incurring unnecessary costs. For those who apply for Social Security before age 65, enrollment in Medicare Parts A&B will be automatic once you turn 65. For those delaying benefits past that age, they must remember to apply for Medicare to avoid unnecessary penalties.
Ultimately, the decision to postpone Social Security benefits is deeply personal and requires a nuanced evaluation of health, financial landscape, taxes, other available resources, and retirement objectives. Striking the right balance between immediate needs and long-term financial security is essential for a stable and comfortable retirement. By weighing the advantages and challenges of delaying benefits, retirees can make informed choices that pave the way for a secure and fulfilling retirement.
Antwone Harris, MBA, CFP®, is Chief Planning Strategist at Platinum Bridge Wealth Strategies in Washington, D.C. His firm focuses on retirement income planning for professionals in or near retirement. Prior to launching Platinum Bridge Wealth Strategies in 2017, he spent 12 years as a VP - Senior Financial Consultant with Charles Schwab Inc. Investment advisory services offered through Osaic Advisory Services, LLC (Osaic Advisory), a registered investment advisor. Osaic Advisory is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Advisory. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this article ay not reflect the views of Osaic Advisory Services, LLC.
Related Content
- What to Know Before You Inherit an IRA
- Five Strategies for Deciding When to File For Social Security
- Using Your 401(k) to Delay Getting Social Security and Increase Payments
- Boost Your Social Security Benefit Every Month You Delay
- Social Security Earnings Tests: 5 Things You Must Know
-
Stock Market Today: Stocks Slip Ahead of Big Earnings, Inflation WeekPerhaps uncertainty about tariffs, inflation, interest rates and economic growth can only be answered with earnings.
-
Ask the Editor — Tax Questions on "The One Big Beautiful Bill Act"Ask the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on the new tax law.
-
I'm a Financial Planner: Here Are Some Long-Term Care Insurance Tips for Every AgeStrategies include adding riders to life insurance for younger individuals and considering hybrid or traditional long-term care policies for those in their mid-50s and 60s.
-
Engineering Reliable Retirement Income in 2025: An Expert GuideFor dependable income, consider using a bucket strategy and annuities in tandem to promote structure, flexibility and peace of mind.
-
Crazy Markets Shouldn't Derail Your Retirement if You Follow This Financial Pro's PlanBeing nervous about retiring in a volatile market is a red flag that you're relying too heavily on your investment portfolio, rather than a comprehensive plan.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to SkipA business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually MagicalDo you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful BillThe law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market JittersMarket volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
