The US government makes no secret of the fact that the longer you wait to collect Social Security, the more money you collect. In fact, the concept is quite simple.
Here’s the deal, straight from the US Social Security Administration.
If you start receiving retirement benefits at age . . .
- 67, you will receive 108% of the monthly benefit because you delayed benefit payments by 12 months.
- 70, you will receive 132% of the monthly benefit because you delayed benefit payments by 48 months.
To refuse this windfall seems contrary to the accumulation of retirement income, an issue that is generally dear to the heart of a retiree.
Yet that is what Americans do regularly. Only 5% of retired American men and 7% of retired women begin receiving Social Security at age 70, when benefits are at their maximum, 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 lower at age 67 or 70.
Why wait? Americans have their reasons.
Why do so few Americans wait until age 70 to collect Social Security? Equally important, do they know they are missing out on significant Social Security withdrawal dollars?
These questions may not matter, say investment experts.
“Some people don’t have a choice,” said Jay Zigmont, founder of Childfree Wealth in Water Valley, Mississippi. “For example, anyone applying for Social Security disability insurance will not be able to delay collection, due to SSA rules.
“Additionally, other beneficiaries are being pushed into involuntary retirement for various reasons and must claim benefits before age 70.”
While some American seniors may fully understand the amount of money they’re losing by collecting Social Security earlier, retirement savings mistakes have already been made and there’s nothing these recipients can do about it except cash in early. social Security.
“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. As a result, they feel they have no choice but to file their case sooner.
What did they forget to do? According to Tyler, some of the common mistakes include:
— Not anticipating early retirement from their job.
– Don’t start downsizing early and sell a home in a down market.
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— Not looking for ways to use your retirement savings to create a protected income stream until you reach age 70.
Your financial situation matters when making payments
Many Americans time their Social Security withdrawals based on their personal needs, and it’s generally the right decision to make at any age.
“For example, if you start getting Social Security at age 62, the break-even point to wait and start Social Security at full retirement age is when you’re around 80,” Melissa Shaw said. , wealth manager at TIAA. “If you don’t have a long life expectancy, it may also be a good idea to start withdrawing Social Security funds as soon as possible.”
For married couples, it may make sense for the highest earner to wait until age 70 to maximize benefits.
“Generally, when one spouse dies, the surviving spouse will lose some of their Social Security income, but if the higher income reaches their benefit maximum, the surviving spouse will keep the higher Social Security income. “Shaw said.
The rate of withdrawal from your wallet while you delay taking Social Security is also important. “If you can keep your retirement savings withdrawal rate below 4%, you should delay Social Security for as long as possible,” Shaw added.
Additional Factors in the Mix
Generally, you need to consider a number of factors when deciding when to apply for benefits, such as what other sources of income you have to meet your spending needs.
“If you’re retiring at, say, 67, you need to have other resources that can meet your needs and whether or not you’re receiving health insurance benefits,” said Colleen Carcone, director of strategy at wealth planning at TIAA.
“If you decide to delay your retirement and file for Social Security when you’re over 65, be sure to consider filing for Medicare in a timely manner or you could be subject to late filing penalties. .”
There is also a nasty tax called the Social Security tax torpedo that affects Social Security withdrawal stages.
“If you’re a middle-income earner and you pay for your retirement by filing for Social Security instead of dipping into your retirement funds, you could end up paying a lot more income tax than if you had reversed it. ‘order,” said Steve Parrish. , co-director of the Center for Retirement Income at the American College of Financial Services.
“In other words, withdraw 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 retirement benefits. social security and pay income tax on 85% of your benefits.
It is also vital to consider your own mortality.
“Although it’s not nice to think, if you start collecting benefits earlier, you’ll collect a smaller benefit for longer,” Carcone said. “If you start collecting benefits later, you’ll get a larger benefit for a shorter period.”
“Most importantly, meet with a financial adviser,” Carcone added. “A financial advisor can help you determine the best way to structure your retirement income so that you can meet your income needs. »
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