Getting the most out of your Social Security retirement benefits could help make your retirement much more enjoyable, and maximizing your benefits could come down to one decision. When do you decide to apply for Social Security?
Deferring until age 70 will be a great choice for many retirees who can benefit from deferred retirement credits while positioning themselves to minimize taxes on their benefits.
A 24% boost just to wait
If you can wait until 70 years to claim your benefits, you will automatically get an increase in your monthly checks.
Each year you wait past full retirement age — age 67 for most readers — will earn you an 8% increase in your Social Security benefit. Wait three years, and you’ve earned a 24% bonus.
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That said, you’re giving up three years of benefits in order to get that monthly benefit increase, but it turns out to be a pretty good deal.
First, social security is linked to inflation. As such, it is an excellent hedge against inflation. These larger monthly checks will also receive larger Cost of Living Adjustments (COLAs) than if you had claimed earlier (on an absolute basis). For example, if you qualify for a $1,000 monthly benefit check at full retirement age, a 5.9% cost-of-living adjustment like the one Social Security recipients have received in 2022 would add $59 to your check each month. But if you wait until age 70 to max out your monthly benefit at $1,240, the same 5.9% COLA would net you an additional $73.
Second, those extra years give you time to optimize your retirement accounts to reduce your taxes throughout your retirement.
Avoid the social security tax
Social Security tax income limits were set in 1983, and they have not been adjusted for inflation since.
That means you don’t have to make a lot of money in today’s dollars before you get hit with taxes on your Social Security benefits. But if you do careful planning before you start collecting Social Security, you can keep your tax bill to a minimum.
It is important to note that withdrawals from a Roth retirement account do not count against your income. So transferring a substantial amount of assets from a traditional retirement account to a Roth account in your late 60s when your income is low could allow you to have years of tax-free retirement in the 70s, 80s and beyond.
Roth conversions have the added benefit of lowering your required minimum distributions (RMDs), which start at 72. If your RMD is higher than necessary, it could end up costing you money in taxes.
Long-term tax planning can result in significantly greater Social Security benefits when you factor in your final tax bill.
Delaying until 70 is not for everyone
There are several cases where deferring until age 70 will not provide the additional benefits you are hoping for.
First, if you rely on Social Security to meet your retirement spending needs and claiming earlier helps you budget, then don’t delay. You’re less likely to need to optimize your portfolio to minimize taxes in this situation, and the benefits of doing so won’t outweigh the need for immediate income.
Second, if you plan to take a spousal benefit, you will gain nothing by delaying beyond full retirement age. Spousal benefits are not eligible for deferred retirement credits – they amount to a maximum of 1/2 of the spouse’s principal insurance amount at full retirement age.
The third case is not so common. A person taking a survivor benefit (for a deceased spouse) can apply for their own benefit and their survivor benefit separately, although they can only receive one at a time. This opens the door for claiming one benefit sooner and the other when the value of the benefit reaches its maximum.
Not just patience, planning
While waiting until age 70 is one of the best ways to maximize your Social Security checks, simply waiting to claim your benefits is not enough.
If you don’t take the necessary steps to plan for your financial future, you will end up with suboptimal results. That’s why it’s important to take the necessary steps to plan for managing your finances at every stage of retirement: before and after you apply for Social Security, before and after you start making the required minimum distributions, and so on.
If you want a richer monthly Social Security payment, earn those deferred retirement credits and keep the taxes on them as low as possible.
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