There are many reasons to delay claiming Social Security benefits. Once we have addressed a few of the common misconceptions and cleared the air for folks they are often more openminded to hearing reason to consider a delayed strategy.
No Forfeiture Of Benefits and COLAs
First and foremost, by waiting until your full retirement age to claim you will avoid forfeiting a significant percentage of full retirement age benefits and the cost-of-living adjustments that you would receive on those lost benefits.
Unless you have been diagnosed with a life-threatening medical condition that could potentially shorten your life expectancy, or you have a family history of short life expectancy due to hereditary health complications, waiting at least until full retirement age often makes sense.
Avoiding the Earnings Limit
Many folks are still working in their early to mid 60s, and claiming Social Security prior to full retirement age will subject your Social Security benefits to the earnings limit. If you’re making good income there’s a chance that you may receive no benefit check at all if you claim early simply because you exceed the earnings limit.
For example, in 2019 if your income is greater than $17,640 you will end up giving back one dollar for every two dollars that you earn over that amount. For many fulltime employed folks earn enough income that they’ll end up giving back most or all of her Social Security check, and receiving nothing. The benefits are not gone for good as they get added back into your benefits later. Nevertheless, in that event why would you want to claim early.
Super-Size Survivor Benefits
Another great reason for claiming benefits under a delayed strategy is to increase the survivor benefit. Often times one spouse is a lower wage earner, and the other spouse is a higher wage earner. When one of the spouses passes away, the surviving spouse will generally receive the higher of the two Social Security benefits, and lose the lower one.
Often times we see that it makes sense for the lower wage-earning spouse to claim benefits early, and get cashflow coming into the household retirement income plan. Meanwhile it often makes sense for the higher wage earner to delay benefits in order to earn delayed retirement credits and increase the future survivor benefit.
Many women outlive their husbands by more than a decade. Most survivor benefits are received by widows. Therefore, it can be somewhat of a women’s planning issue when making smart Social Security claiming decisions.
It’s quite common to see a husband with a higher Social Security benefit. There may be many reasons for this and while it is not always the case, it is most common. Meanwhile the wife may have been the lower wage earner for a number of reasons, and she is often the younger spouse.
It is really a selfless decision for an older male spouse as a higher wage earner to delay claiming Social Security benefits. There’s a natural desire for him want to claim early and start receiving benefits on his record. After all, he wants to get if before it’s gone, or before he’s gone.
However, delaying so that the survivor benefit is optimized will likely have a profound impact on his spouse after he’s gone.
Acting on impulse and claiming early under these conditions could be viewed as a selfish decision. It would permanently reduce his Social Security benefits, lose out on any delayed retirement credits, and thus reducing the survivor benefit permanently.
Coordinating benefits with your spouse is one of the primary reasons to seek guidance from a financial professional who specializes in retirement income planning and Social Security optimization.
We’re Living Longer
Another reason for delaying Social Security claiming is we are living longer and our retirement income must last as long as we do. Life expectancies have increased substantially. According to the Society of Actuaries 1 in 3 men and 1 in 2 women in their mid 50s will live to be age 90. For couples age 65 today there’s a 50% chance that one of the persons will live to age 92.
Developing a plan in which your retirement resources are exhausted at your life expectancy is a plan that will fail 50% of the time. This is because by definition life expectancy is the midpoint at which half your peer group is alive and half of your peer group has passed. If your retirement income plan isn’t sufficient to get you beyond your life expectancy, the odds of running out of your money may be the same. You can flip a coin.
Delaying Social Security benefits is one way to increase the odds of not running out, and planning for the wellbeing of the surviving spouse.
It’s Tax Advantaged Income
Another reason for claiming a delayed strategy is the potential tax benefits. When working with a financial professional who understands how to coordinate all of your retirement resources including Social Security strategies it may be possible to reduce your taxable income during the waning years of retirement.
Believe it or not, sometimes it makes more sense to delay your Social Security benefits, and use some of your pretax (IRA or 401K) retirement assets to fill the gap. For example, if someone wanted to retire at age 65 it might make sense for them to use some of their pretax money to maintain their lifestyle from age 65 to age 70 while they allow their Social Security benefits to earn delayed retirement credits.
By the time they turn on Social Security which is tax advantaged, government backed and inflation adjusted, they may have spent down a good portion of their pretax dollars. In that case their required minimum distributions after age 70 ½ are likely to be lower than they would have been otherwise. Since distributions from pretax accounts have a profound impact on the taxation of your social security benefits this may be one way to mitigate taxes on your social security benefits.
The decision about when and how to claim Social Security benefits in order to maximize your household retirement resources is not one you want to take lightly. It’s probably not something you want to do on your own. Therefore, it may be wise seek the guidance of a financial professional who specializes in Social Security optimization and retirement income planning.
Specialized Knowledge & Skills
Many financial advisors have little to no experience when it comes to social security optimization. They have become experts in wealth management, investment management, and other factors impacting the accumulation phase of retirement saving. However, retirement income planning and the art of distributing assets to last a lifetime requires a complete different set of skills and knowledge.
The social security administration won’t be able to help either. They will do the best job they can to get you the highest benefit you are entitled to the day that you file. However, they are not allowed to give advice or coordinate your benefits with your other retirement resources.
We would strongly recommend seeking the guidance of a comprehensive fee-based planner. Specifically, one who will thoroughly diagnose your specific circumstance, and is equipped with the proper knowledge, team, and tools to organize and analyze all of retirement resources before you make any irrevocable decision.
Your advisors should be expected to complete an analysis including a(n):
Thorough evaluation and suggested optimization of household Social Security benefits
Review of your investment allocations, performance, and fees
Projection of taxes in retirement and offer strategies to manage and mitigate them
Analysis of healthcare costs including Medicare premiums and copays
Evaluation of long-term risk care exposure to you and your family
Review of your current estate plan documents.
Don’t feel like you have to settle for anything less! Make sure you get a complete draft of a retirement income blueprint outlining how best to utilize all of your retirement resources to maintain your desired lifestyle, pay as little in taxes as possible, minimize the impact of investment fees, plan for expected health care needs and unexpected long-term events, and efficiently pass any remaining assets and possessions to the next generation.
"Investment Adviser Representative of and advisory services offered through Royal Fund Management, LLC, a SEC registered investment adviser."