Early Vs Late Social Security Claiming: A Financial Analysis - Retirement Planning

Timing is often regarded as a critical factor for success in the world of finance. Time is one of the essential principles of investing, whether it is starting early, staying invested for the long term, or knowing when to withdraw your funds. One area where timing can make a significant difference in your financial future is the decision of when to claim Social Security benefits. You have likely heard the advice to delay claiming Social Security until the age of 70 to maximize your benefits, but why is waiting considered beneficial? Read on to learn more.

Seeking guidance from a financial advisor can play a crucial role in understanding the repercussions of your decision on when to file for Social Security benefits. In this article, we will discover the consequences and benefits of delaying your Social Security benefits and explore whether it genuinely helps secure your financial future.

How does the time of claiming your Social Security benefits affect you?

Social Security benefits can reward you if you delay claiming benefits with an 8% increase in your benefit payments for each full year you hold off after reaching your full retirement age, up until the age of 70. For individuals born in 1960 or later, this means you could potentially receive 24% more by waiting until you are 70 years old to collect Social Security retirement benefits.

To put this into perspective, let’s compare waiting until 70 with claiming benefits at the earliest possible age, which is 62 years. Economists David Altig, Laurence Kotlikoff, and Victor Yifan Ye conducted an analysis, calculating the present value of the median lifetime loss in this scenario.

The result showed that, on average, individuals who claim benefits at 62 may be forfeiting a substantial figure of $182,370 over the course of their retirement.

Hence, the timing of your Social Security claim is more critical than you might think. Many Americans grapple with this decision, with 10% planning to wait until the age of 70, according to Schroders’ 2023 U.S. Retirement Survey. While there are valid concerns about the program’s future, waiting to claim benefits can substantially increase your retirement income. It is crucial to weigh the potential lifetime loss against immediate financial needs and consider consulting with a financial advisor to make the right decision that aligns with your unique retirement goals and circumstances.

Pros of claiming Social Security benefits at age 70

1. You can claim a bigger Social Security benefits check

As mentioned above, one of the most critical reasons to wait until the age of 70 to claim your Social Security benefits is the substantial increase in your monthly payout. With this boost, you get an 8% delayed retirement credit that Social Security adds to your eventual monthly benefit for each year you hold off up until age 70. This is a guaranteed increase in your investment. Considering the fact, it is rare to find a financial product that guarantees an 8% annual return in retirement, this can be a financially rewarding decision.

There is no risk of losing your money, and you can earn potentially inflation-beating returns. The 10-Year Breakeven Inflation Rate in the United States for August 2023 stands at 2.24%, as reported by the United States Federal Reserve. Historically, the country has seen fluctuations in inflation. It reached a record high of 3.02% in April 2022. Conversely, during the global financial crisis in November 2008, the 10-year Breakeven Inflation Rate plummeted to a record low of 0.04%. The 8% increase in Social Security benefits far exceeds these average inflation rates. It also exceeds the Cost-Of-Living Adjustments (COLAs) that Social Security beneficiaries have received over the past decade, which have averaged around 1.5% annually.

By waiting, you are not only preserving your hard-earned benefits but also maximizing your monthly income, which can provide added financial security throughout your retirement years.

2. You secure a stream of income for an extended retirement period

As life expectancy continues to rise, retirees are faced with the prospect of funding a more extended retirement period. According to the Centers for Disease Control and Prevention (CDC), the average American who reaches age 65 can expect to live another 12 years. By delaying your Social Security claim until age 70, you can position yourself to receive significantly higher benefits during these additional years. You will have a substantially larger pool of money to cover your financial needs as you age. This can help you combat longevity risk and eliminate the possibility of outliving your retirement savings or being dependent on your children for money. The increased income can be invaluable in ensuring that you enjoy a comfortable and financially secure retirement for the long haul.

3. You could optimize your tax liability

Delaying your Social Security benefits can positively impact your income tax liability in retirement. This is a financial benefit that many people tend to overlook when considering their Social Security strategy. It is essential to be aware that a portion of your Social Security income could be subject to taxation. The extent of this taxation depends on your combined income, which is calculated as a sum of your adjusted gross income, any non-taxable interest, and half of your Social Security benefits.

For single taxpayers, if your combined income falls within the range of $25,000 to $34,000, up to 50% of your Social Security benefits may be taxable. However, if your combined income exceeds $34,000, a larger portion of your benefits, up to 85%, may be subject to taxation. For married couples filing jointly, the income threshold for tax is slightly higher. If your combined income falls between $32,000 and $44,000, up to 50% of your Social Security benefits may be taxable. Beyond the $44,000 combined income threshold, as much as 85% of your benefits could be subject to taxation.

By waiting until 70 to claim your benefits, you might be able to keep your income within a lower tax bracket. This can translate into substantial tax savings over the course of your retirement. This strategic move will not only boost your Social Security benefits but also optimize your overall financial situation.

4. You will put less pressure on your total retirement fund

Delaying your Social Security benefits until age 70 is not just about maximizing your monthly income; it is also about reducing the financial strain on your total retirement portfolio. By holding off on Social Security benefits, you can balance out your withdrawals and allocate specific accounts for different phases of your retirement. This strategic approach can streamline and potentially stretch your retirement fund.

During the years when you are delaying Social Security, you will need to rely more on your other retirement savings, such as your 401(k), Individual Retirement Accounts (IRAs), or investments like stocks, bonds, mutual funds, etc. This will give your Social Security benefits time to grow. When you finally start receiving those higher Social Security checks at age 70, you may find that you need to withdraw less from your other accounts to cover your living expenses. This strategy will reduce the risk of prematurely depleting your savings and give you more financial flexibility in your later retirement years.

5. You can help ensure you maintain financial stability in later retirement years

Claiming Social Security at age 70 can provide a vital layer of financial stability in your later years. As you advance in age, your healthcare and long-term care expenses may increase. By waiting to claim your benefits, you are creating a more substantial financial safety net to handle these potentially significant costs. Social Security benefits are inflation-adjusted, which means they keep pace with rising living costs. By waiting until 70 to secure these higher benefits, you can be better equipped to combat the effect of inflation on your retirement income.

Cons of delaying your Social Security benefits until age 70

1. You may have to self-finance until age 70

When you delay Social Security until age 70, you will need to cover your living expenses and retirement costs through other means, such as personal savings or retirement accounts, for a more extended period. If you have limited resources, this can be challenging and may require you to live more frugally during the years leading up to age 70. This financial strain can lead to both mental and financial stress.

2. The risk of an early death may mitigate the benefits of delaying

One significant downside of delaying Social Security is that if you pass away before reaching age 70, you will not receive any of the benefits you have deferred. This can be a concern for individuals who are not in good health or have a family history of shorter lifespans. In such cases, the decision to delay benefits may result in a less financially fulfilled life, especially if those benefits could have been used to enhance your quality of life in earlier retirement years.

3. You may face a terminal illness or have to deal with debt

Delaying Social Security benefits can be particularly challenging if you are dealing with a terminal illness or a significant debt burden. In these situations, the need for financial resources may be more immediate. Delaying benefits until age 70 could limit your ability to address pressing medical bills, debt obligations, or other critical financial needs, potentially exacerbating your financial challenges.

When to file for Social Security benefits: Is 70 the right age for everyone?

While delaying Social Security benefits until age 70 can be a beneficial strategy for many retirees, it is not without its downsides. If you have other sources of income, substantial retirement savings, or a pension that can sustain you comfortably until age 70, delaying Social Security can be an intelligent choice. It allows you to maximize your monthly benefit and enhances your financial security during your later retirement years. If you are in good health, have a family history of longevity, or expect to live a longer life, delaying benefits can provide more substantial financial support throughout your retirement. Postponing your benefits can also be a tax-efficient strategy, especially if you can keep your income in a lower tax bracket during the years before claiming Social Security.

If you are facing immediate financial challenges, such as mounting medical bills, debt, or essential living expenses, it may be more practical to claim Social Security benefits earlier to address these pressing needs. If you have limited savings and resources, waiting until age 70 to claim benefits may lead to financial strain. In this case, it might be more prudent to claim benefits earlier and ensure a more comfortable retirement lifestyle.

To conclude

The timing of your Social Security claim can impact the amount of money you receive during your retirement years. By examining the potential gains and losses associated with waiting until age 70 to claim your benefits, you can gain a clearer understanding of the financial implications of this decision. Whether you are on the verge of making this choice or simply looking to optimize your retirement planning, understanding the pros and cons of your decision can make all the difference.

A financial advisor can help you assess factors such as your health, other sources of income, and tax considerations to determine when to file for Social Security benefits. Use the free advisor match service to find an advisor who specializes in retirement planning and Social Security. Simply answer a few questions about your financial needs, and our matching tool will connect you with 1-3 advisors who are most suitable for meeting your financial goals.