There are many important financial decisions to make as you plan for retirement. One of those decisions is determining the optimal timing to begin taking Social Security benefits. While you can start taking Social Security as early as age 62, there may be some advantages to waiting until you’re older.
Following are several important considerations to keep in mind.
Age
While you can start receiving Social Security benefits as early as age 62, you won’t be eligible to receive full retirement benefits until you reach your full retirement age (FRA), which is between age 66 and 67, depending on the year you were born. Your monthly benefit payment increases by approximately 8 percent each year after FRA that you delay taking benefits (up to age 70).
Portfolio value
While taking Social Security early results in a reduced monthly benefit amount, doing so may help preserve the growth potential of your investment portfolio. For example, if you retire at age 62 but don’t start taking Social Security until age 68, you’ll need to rely on distributions from your retirement savings to pay for your lifestyle expenses during your first six years of retirement. That means those assets are no longer invested in the markets and can no longer grow to help keep up with inflation.
A more severe risk arises if your investments drop in value during those first six years and you’re forced to sell more shares in order to receive the same monthly income. In addition to realizing a loss on those shares, you’re removing them from the market, which can result in a loss that’s impossible to recover from.
Receiving Social Security benefits early can help minimize the amount you withdraw from your retirement accounts, allowing more assets to continue growing over time.
Tax impact
While taking Social Security early can help protect the value of your portfolio from market volatility, taking it late can help reduce tax exposure. Social Security payments could be subject to tax, based on your annual “combined income,” which is determined using the following calculation: AdjustedGross Income (AGI) + Non-Taxable Interest + ½ of Social Security Benefit = Combined Income.
If you face high taxes based on your combined income, it may make sense to delay Social Security and draw from your retirement savings during the first few years of retirement. By drawing down your taxable assets, you may be able to reduce your combined income enough to also reduce your Social Security tax exposure.
Life expectancy
Your life expectancy is also important to consider. If you suffer from a chronic illness or have a family history of health issues, you may want to begin receiving Social Security at a younger age, even if it means you receive less each month. On the other hand, if you’re healthy and have a family history of longevity, you may want to delay taking it in order to maximize your monthly payment amount.
Spousal benefits and survivor considerations
Social Security timing may impact the amount your spouse receives after you die, which is why it’s important to consider your spouse’s needs and benefits eligibility when determining optimal timing. Typically, a surviving spouse receives the higher of the two spouses’ benefits. This means the higher-earning spouse could maximize the surviving spouse’s benefits by waiting until after FRA to begin drawing Social Security.
This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
AJ Kratz, CFA, CFP, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms, providing comprehensive wealth management services to help align all elements of a client’s financial life, including investments, taxes, estate planning, and risk management. For more information, or to request a free, no-obligation consultation, visit creativeplanning.com.