Many rely on Social Security benefits as a crucial part of retirement planning. While claiming benefits early might seem tempting, understanding the advantages of delaying Social Security can significantly enhance your financial security in retirement. This article explores the key benefits of delaying your Social Security benefits and helps you determine if this strategy is right for you.
How Delaying Social Security Works
You can begin receiving Social Security retirement benefits as early as age 62. However, claiming before your full retirement age (FRA) reduces monthly payments. Your FRA depends on your birth year, ranging from 66 to 67 for those born in 1954 or later. Delaying past your FRA earns “delayed retirement credits,” increasing your benefit by 8% annually up to age 70. This can result in a 32% increase over your full retirement amount.
Top Benefits of Delaying Social Security
- Increased Monthly Social Security Payments: Delaying your Social Security payments will substantially boost your monthly income, offering greater financial stability in retirement.
- Inflation Protection (COLA): Social Security benefits are adjusted annually for inflation (COLA). A higher base benefit means larger COLA increases over time.
- Maximizing Survivor Benefits: Delaying increases potential survivor benefits for your spouse, providing crucial financial security if you pass away first.
- Longevity Insurance: Delaying acts as longevity insurance, ensuring a higher income stream if you live a long retirement.
Delaying Social Security May Reduce Your Taxes
By delaying Social Security, you effectively lower your AGI during those years of delay. This can result in a lower “combined income,” potentially keeping more of your Social Security benefits from being taxed when you eventually claim them. This lower-income period is an ideal time to perform Roth IRA conversions. By converting during these years, you can potentially:
- Pay Taxes at a Lower Rate: Lower income during the delay period may put you in a lower tax bracket, reducing the tax on Roth conversions.
- Reduce Future Tax Burden: Converting to a Roth now at a potentially lower rate avoids higher taxes on those funds in retirement.
- Minimize RMD Impact: Roth conversions before RMDs (starting at 73 or 75) reduce future taxable withdrawals and their potential to increase your tax bracket and the taxation of your Social Security benefits.
Deciding when to claim Social Security is a personal decision. However, understanding the benefits of delaying can empower you to make informed choices. Delaying may significantly improve your financial well-being if you can afford to wait and expect a long retirement.
