The U.S. government is not hiding the fact that the longer you wait to collect Social Security, the more money you collect. In fact, the concept is fairly straightforward.
Here’s the deal, straight from the U.S. Social Security Administration.
If you start receiving retirement benefits at age . . .
- 67, you'll get 108% of the monthly benefit because you delayed getting benefits for 12 months.
- 70, you'll get 132% of the monthly benefit because you delayed getting benefits for 48 months.
Turning down that windfall seems contrary to income accumulation in retirement, an issue that’s usually near and dear to a retiree’s heart.
Yet that’s what Americans routinely do. Only 5% of U.S. male retirees and 7% of female retirees start taking Social Security at age 70, when benefits are at their highest, the SSA reported.
The SSA also notes that about half of all retirees take Social security benefits before full retirement age and a quarter (25%) take their benefits at the trigger date of age 62, when withdrawal amounts are significantly less than at age 67 or 70.
Why Wait? Americans Have Their Reasons.
Why do so few Americans wait until age 70 to collect Social Security? Just as important, do they know they're missing out on significant Social Security takeout dollars?
Those issues may not matter, investment experts say.
“Some people don’t have a choice,” said Jay Zigmont, founder of Childfree Wealth, in Water Valley, Miss. “For example, anyone who’s claiming Social Security Disability Insurance won’t be able to delay collecting, due to SSA rules.
"Additionally, other recipients are pushed into involuntary retirement for a variety of reasons and need to claim benefits before age 70.”
While some American seniors may fully understand the amount of cash they’re forfeiting by collecting Social Security early, retirement-savings mistakes have already been made and there’s nothing those recipients can do about it, except for cashing in on Social Security early.
“Most retirees probably understand the loss,” said Paul Tyler, chief marketing officer at Nassau Financial Group in Hartford, Conn. “However, far too many people paint themselves into a financial corner late in life. Consequently, they feel they have no choice but to file early.”
What did they forget to do? According to Tyler, some of the common mistakes include:
-- Not anticipating earlier-than-planned retirement from their jobs.
-- Not starting to downsize earlier and selling a house in a down market.
-- Not looking for ways to use their retirement savings to create a protected income stream until they turn 70.
Your Financial Picture Matters When Taking Payouts
Many Americans time their Social Security withdrawals based on personal needs, and that’s generally the right move to make at any age.
“For instance, if you start receiving Social Security at age 62, the break-even point for waiting and starting Social Security at full retirement age is when you’re about 80,” said Melissa Shaw, a wealth manager at TIAA. “If you don’t have a long life expectancy, it also may make sense to start taking out Social Security funds as early as possible.”
For married couples, it can make sense to have the highest-income earner wait until age 70 to max out the benefits.
“Typically when one of the spouses passes away, the surviving spouse will lose some Social Security income, but if the highest-income earner maxes out their benefits, the surviving spouse will retain the higher Social Security income,” Shaw said.
The withdrawal rate from your portfolio while you are delaying taking Social Security is important as well. “If you can keep the withdrawal rate of your retirement savings below 4%, you should delay Social Security as long as possible,” Shaw added.
Additional Factors In the Mix
Generally, you should consider a number of factors when you're deciding when to claim benefits, such as the other sources of income you have to meet your spending needs.
“If you retire at, say, age 67, you need to have other resources that can meet your needs and whether or not you’re receiving Medicare benefits,” said Colleen Carcone, director of wealth planning strategies at TIAA.
“If you decide to delay your retirement and claim Social Security when you’re older than 65, be sure to consider filing for Medicare in a timely manner or you may be subject to late-filing penalties.”
There’s also a nasty tax referred to as the Social Security tax torpedo that affects Social Security withdrawal stages.
“If you’re a middle-income earner, and pay for your retirement by filing for Social Security instead of tapping into your retirement funds, you may end up paying significantly more income tax than if you had reversed the order,” said Steve Parrish, co-director of the Center for Retirement Income at The American College of Financial Services.
“In other words, draw down your IRAs and other retirement savings first and wait to file for Social Security until later. In some situations, it can mean the difference between paying 0% on your Social Security benefits and paying income tax on 85% of your benefits.”
It's also vital to consider your own mortality.
“While it’s not pleasant to think about, if you begin collecting benefits earlier, you’ll collect a smaller benefit for longer,” Carcone said. “If you begin collecting benefits later, you’ll take out a larger benefit for a shorter period of time.”
“Most importantly, meet with a financial adviser,” Carcone added. “A financial adviser can help you to decide how to best structure retirement income so that you can meet your income needs.”