As my retirement approached in 2021, my wife and I collaborated closely with our financial advisor to determine our streams of income in retirement.
With expected higher future prices and greater medical expenses in our older years, we wanted to ensure our income and investments could support us.
Since I turned sixty-two in December 2021, I needed to decide whether to start collecting Social Security benefits immediately. We discussed this with our advisor to lay the groundwork twelve years ago when I was fifty.
We met regularly to discuss current issues (e.g., debt paydown plan) as well as longer-term issues (e.g., 401(k) plans, Social Security, and other retirement vehicles) to ensure we were well-prepared for retirement. To increase my benefits overall, I chose to delay my Social Security benefits until at least my full retirement age (FRA) at age sixty-six years and ten months, which will occur in October 2026.
While filing for benefits at age 62 makes perfect sense for some people, in most cases, it’s not the best approach.
For example, it makes sense for those sent into early retirement for health reasons and who need help paying for medical care (remember that Medicare doesn’t kick in until age 65). Also, if you retire at 62 or earlier, you may need the money for day-to-day expenses. Filing for benefits makes sense for some who need the money to pay off high-interest debt.
However, as a retired 63-year-old man, I wanted to share some reasons why my wife and I decided to delay your Social Security benefits for as long as possible. And why delaying your Social Security benefits might benefit you as well.
1. Reduced Monthly Payouts
While you can start receiving your Social Security benefit at age 62, you won’t be eligible for the full amount until you reach your “full retirement age (FRA),” which varies according to your birth year but falls somewhere between your 66th and 67th birthday.
Turn 62 this year and decide to claim your benefit. You’ll receive a whopping 30% less than you’d get by waiting until full retirement at 66-67, according to the Social Security Administration (SSA). And if you wait even longer, your entitlement will increase a little bit more each month until you turn 70, at which point your benefit will have maxed out.
It’s important to realize these three critical ages of 62, 66-67 at FRA, and the maximum starting age of 70!
2. Putting in Extra Years of Work Will Payoff
The SSA calculates your benefits on your 35 highest years of earnings. So, if your career is shorter than 35 years, you’ll leave retirement income on the table.
For example, if you have a 32-year earning history that ends at age 62, SSA will determine your benefit not by calculating average earnings over those 32 years but by averaging those 32 years plus three years’ worth of zeros. While I’m not a math expert, clearly, a long string of ZEROS will NOT help your benefit calculation!
3. You will be better protected against inflation
As 2022 taught us, inflation can majorly impact our retirement needs. Many Americans worry about the rate at which inflation will chew up their hard-earned retirement savings built up in accounts like 401(k)s and IRAs. Inflation in 2022 hit its highest level in four decades, according to consumer price index (CPI) data.
At the start of this year in 2023, Social Security recipients saw the largest cost-of-living-adjustment (COLA) adjustment in decades, 8.7%, due to historically elevated levels of inflation. Because the COLA is calculated as a percentage of your benefit, waiting to claim your benefit translates into a larger monthly benefit to offset the pain of inflation.
4. Avoid Paying More Taxes in Retirement
Many people don’t realize that their Social Security benefit is potentially taxable.
If your “combined income,” which includes taxable withdrawals from retirement accounts as well as 50% of your Social Security benefit, exceeds certain thresholds, you will pay tax on as much as 85% of your monthly benefit…OUCH!
To avoid this scenario, you should try to minimize the percentage of your retirement income coming from taxable withdrawals from such investments as 401(k)s while maximizing the percentage from Social Security.
The best way to increase your benefits is to delay your benefits for as long as economically feasible.
5. You Could Deprive Your Spouse of Higher Benefits
According to a 2022 American Family Study conducted through Brigham Young University (BYU), the share of married Americans has fallen to 45%, down from 50% in 2015. Clearly, there is a demographic shift away from traditional marriages in the United States.
If you are happily married, like me, it is particularly important to consider what would happen when one spouse dies before the other.
If you die before your spouse, your widow or widower could potentially receive a larger monthly payout through the Social Security Survivor’s benefits. But if you are receiving reduced benefits due to selecting an earlier age of collecting benefits, the survivor’s benefit is based on that reduced amount. In other words, your decision of when to take your SS benefits affects you AND your spouse.
Since I am a healthy person with moderate exercise, there is a good chance I will live into my eighties.
Hypothetically, if I live to age eighty-five and I qualify for the average Social Security benefit of $1,500 per month (mine and yours will be MORE based on our higher income levels), my total benefits received will be $325,000 if I start my benefits at FRA versus $290,000 if I started earlier at age sixty-two.
If I live until age eighty-five, I stand to receive significantly more Social Security benefits than I would by collecting early at age sixty-two.
What’s The Most Popular Age To Collect Social Security?
Based on this article, you would assume most people wait to at least their FRA (like me) to begin collecting their benefits. Per a thought-provoking article on this topic, age 62 is the second most popular age to sign up for Social Security at 30 percent.
However, the rate has declined steadily from 50 percent in 2005. Surprisingly, age 66 is the most popular age at 34 percent, as this is the age when people born between 1943 and 1954 are eligible to claim full Social Security benefits.
In the article, The Most Popular Ages to Collect Social Security, Christopher Rhim, who holds the CERTIFIED FINANCIAL PLANNERTM designation, states, “When you take it at your full retirement age (FRA), which for a lot of people retiring today is sixty-six, there are no reductions in retirement benefits.”
The good news is that people are becoming more educated on this confusing Social Security benefit timing issue, resulting in more people waiting for the higher benefit payouts later.
How To Boost Your Retirement Savings?
With growing concerns about the health of these federally subsidized programs, I wanted to expand this article to present some helpful ideas on how to boost our retirement savings.
1. Maximize the company match for your retirement plan.
A Vanguard 2021 study says roughly “one-third (34 percent) of Americans with 401(k) plans are saving below their employee matches”.
In 2023, you can contribute up to $22,500 ($30,000 if you are fifty or older). These 401(k) matches were important for building our retirement portfolio and enabling my wife and me to retire early.
2. Contribute to a Roth IRA to increase retirement savings.
If you are over the income threshold discussed below, increase your savings with a backdoor Roth IRA. If you are a single taxpayer making over $153,000 in 2023, or a joint tax filer making over $228,000, then your income is too high to contribute to a Roth IRA.
A backdoor Roth IRA allows high-income earners to convert pretax contributions into a Roth IRA. They can do this by first contributing to a traditional IRA and then converting that account into a Roth IRA, which is particularly advantageous because retirees do not have to pay taxes when making withdrawals.
3. Boost your retirement savings with a health savings account (HSA).
An HSA allows you to put money aside to pay for unexpected medical expenses. Contributions are tax-deductible if you spend the money on qualified medical expenses. These expenses include payments to doctors and other medical practitioners, prescriptions and insulin, X-rays and laboratory tests, eyeglasses and contact lenses, and nursing help and hospital care. Any unused funds could continue growing indefinitely, particularly when invested wisely. My wife and I invested our HSA in low-risk and low-fee stock funds.
There is no “perfect strategy” to maximize the Social Security benefits over your and your spouse’s lifetime. My advice is to set up your own online Social Security Account at the following website: www.ssa.gov/myaccount.
This allows you to review estimates of YOUR monthly benefit under various assumptions, which is great for retirement planning. Another good reason to create an account is that if you don’t have one, an identity thief who gets your Social Security number could use it to create an account in your name & claim your benefits.
My best advice is as follows:
- Stay healthy by exercising and eating a proper diet so that you can enjoy your higher Social Security benefits while reducing your medical costs.
- Do what seems best for your family and collaborate closely with a financial advisor.