Deferring Social Security can be a shrewd maneuver, but it’s not the right course of action for everyone. There are trade-offs involved. Understanding them can help you decide whether continuing to postpone your claim is benefiting you or hindering your retirement journey. Read on to learn more about how to think through this important decision and gain insights into the point at which waiting to claim Social Security stops helping you and starts costing you money.
Why Do So Many People Keep Delaying Social Security?
For many people, the decision to delay Social Security is driven by emotion. After spending decades accumulating wealth and postponing gratification, turning on Social Security feels like you’ve crossed the line into retirement. When you’re still working part-time, it’s understandable to resist this misperception.
The fear of making a mistake also underpins the inclination to defer claiming benefits. Since benefits increase if you wait, deferral can feel like the safe, sensible choice. However, in some situations, postponing benefits can be a drag on your finances.
Quite simply, the objective shouldn’t be to maximize your monthly benefit at all costs. Rather, you should strive to claim as much lifetime Social Security benefits as possible, while embracing a retirement plan that works for you.
How Much More Does Waiting Actually Increase My Benefit?
Good to Know: Full retirement age is the age at which you can claim 100% of your Social Security retirement benefits. For anyone born in 1960 or later, full retirement age is 67. For those born before 1960, the age is gradually lower – between 65 and 66.
If you’ve reached full retirement age, waiting to claim Social Security will increase your benefit by 8% annually until age 70. At 68, your full retirement age benefit would have been earned at age 66 and 8 months. Let’s assume the amount earned is $3,000 per month.
- Claiming at age 68 will produce a monthly benefit of $3,320.
- Waiting until age 69 will increase that amount to $3,560.
- Delaying all the way until age 70 will raise your benefit to $3,800.
The larger checks are appealing, particularly because the increase lasts for the rest of your life. That said, waiting comes with a cost. By postponing benefits from age 68 until age 70, you’re giving up two years of payments. In this example, that amounts to nearly $80,000 of forgone benefits.
Good to Know: Once you reach age 70, delayed retirement credits stop accruing, meaning there is generally no advantage to postponing your claim any longer.
So, How Long Do I Need to Live for Larger Monthly Checks to Overshadow Forgone Payments?
The undiscounted break-even point for delaying benefits often falls in one’s early 80s. Suppose you claim benefits at age 68 and receive $3,320 per month. If you instead wait until age 70 and receive $3,800 per month, the higher payment eventually catches up to the income you missed during those two years (nearly $80,000) just shy of age 83.
Since the economics often begin to shift around the early 80s, if you don’t expect to live beyond this point, claiming sooner is likely to produce more lifetime benefits. Alternatively, if you anticipate living deep into your 80s or beyond, delaying will probably prove more financially rewarding.
That said, there is no universally correct decision. The right decision is the one that best reflects your circumstances and priorities.
As you assess things, it could be beneficial to ask yourself the following questions:
- How long did my parents and aunts and uncles live?
- How good do I feel about my overall health?
- Am I generating enough income to comfortably defer Social Security until age 70?
- Would I rather have more income while I’m younger and more active or preserve it for my 80s and beyond? If I claim now, what meaningful experiences would the additional income allow me to pursue?
- Would taking Social Security now allow me to preserve more of my investment portfolio during the early years of retirement? If the market experiences a prolonged downturn, would having Social Security income sooner reduce stress?
- Does my spouse stand to benefit from a larger survivor benefit if I delay?
Thoroughly reflecting on your situation helps you see that making your Social Security election is as much a quantitative as a qualitative decision. Considering your retirement lifestyle preferences is just as important as running the numbers.
Good to Know: This example uses undiscounted cash flows. For a more precise break-even calculation, ask your financial advisor about the discounted cash flow approach, which typically pushes the break-even age out further.
What If I Want to Delay Benefits but Still Need Reliable Income?
The notion of receiving larger Social Security benefits is attractive, but deferral only makes sense if you have alternate streams of income to rely on during the waiting period. Generally, this includes some combination of part-time earnings, pension payments, and interest and dividend income from bond and stock investments.
Some individuals also use immediate annuities to produce income during the deferral period. In exchange for an upfront premium, these insurance products provide a guaranteed stream of income for a specified period or for life.
As you work through the Social Security deferral period, a dependable income floor is essential to cover life’s day-to-day expenses, including housing costs, groceries, insurance premiums and healthcare expenses. This provides the invaluable peace-of-mind you need to confidently navigate the various phases of your retirement plan.
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Does Part-time Income Affect My Social Security Benefits?
Many people assume that continuing to work means you should automatically postpone Social Security. In reality, earned income and Social Security benefits are not mutually exclusive. If you’ve already reached full retirement age, there is no earnings limit. Whether you earn $20,000 or $200,000 of income, your Social Security payments won’t be reduced.
That said, prior to full retirement age, the Social Security Administration does apply an earnings test and may temporarily withhold a portion of your benefits if earned income exceeds certain thresholds. Importantly, withheld amounts aren’t lost forever. Instead, they are factored into your benefit calculation later in life.
Closing Thoughts
Delaying Social Security can be lucrative, but waiting to get bigger monthly checks isn’t always the best move. For some people, waiting until age 70 to claim benefits creates valuable longevity protection. For others, claiming earlier allows them to enjoy the initial years of retirement with less anxiety and greater financial flexibility.
The optimal decision is a highly personal matter that depends on your health, longevity expectations and near-term financial resources. If you need help making sense of everything, leverage a financial advisor. He or she can help you evaluate the trade-offs, run break-even analyses and examine how Social Security benefits fit into your broader retirement plan. A robust, collaborative process should reduce any lingering anxiety and ensure you make the right decision.
