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Why You Might Want to Wait Until Age 70 to Claim Social Security Benefits

You might’ve heard that it pays to wait until the age of 70 to claim your Social Security benefits, yet you’re itching to retire at 62. Well, before making any decision, it’s worth the time to learn why you might want to hold off. That doesn’t mean you can’t retire in your early 60s, just that it’s vital to know all the advantages that come with waiting.

Below are the three biggest reasons it’s worth waiting to retire at the age of 70.

  1. Bring in More Money Each Month

That’s right, putting your retirement on hold until 70, which is the full retirement age or FRA, means you’ll bring in more each month through your Social Security benefits. Many people aren’t aware that they forfeit up to 30 percent of the money they’re due by retiring early. In comparison, waiting until your FRA, the government adds an 8 percent delayed retirement credit onto your expected benefit payout … guaranteed.

Think about that for a second. The average cost of living adjustment or COLA is only 1.5 percent annually as of today. The 8 percent incentive to hold off on retirement is far greater. Not only that, but with each COLA, there’s a chance of seeing an increase in Medicare premiums.

  1. Years to Withdraw Your Social Security Benefits

There’s no way to predict how long an individual will live. However, life expectancy today is much greater than ever before. According to the Centers for Disease Control and Prevention, Americans who live to 65 can anticipate enjoying another 19 years of life. So, even if you wait to take your Social Security benefits until the age of 70, you’d enjoy a secure and steady income for at least 14 years.

To put things into perspective, consider this. If you wait until the age of 70 to retire, you’ll earn 75 percent more than if you retire at 62. That’s a tremendous difference. That means you’ll have far more money during your “Golden Years.”

There’s something else to think about. When a spouse passes away, the government cancels out the lower of the two Social Security benefits. So, by waiting as long as possible to collect your benefits, not only will you receive more money each month while alive, but you’ll also pass that same amount of money down to your loved one after your death. That alleviates tremendous financial stress.

  1. Lower Your Tax Bill

Many individuals have no idea that they could end up owing taxes on federal income to the tune of 85 percent of their Social Security benefits. Allow us to explain.

  • You file your federal tax return as an individual.
  • Your provisional income, which is your adjusted gross income plus non-taxable income plus 50 percent of your Social Security benefits, ranges between $25,000 and $34,000.
  • Up to 50 percent of your Social Security benefits get federally taxed as earned income.

Using this scenario, if your provisional income goes beyond the $34,000 threshold, the government could hit you with federal taxes on as much as 85 percent of your benefits from Social Security.

Here’s another example:

  • You and your spouse file joint taxes.
  • Your combined provisional income runs anywhere from $32,000 to $44,000.
  • Up to 50 percent of your Social Security benefits get federally taxed as earned income.

As before, if the combined provisional income goes over $44,000, the government might tax as much as 85 percent of your Social Security benefits.

If you have little taxable income by the time you retire, there’s a good chance you won’t have to pay any federal taxes at all on your benefits. On the other hand, if you have sizable retirement savings, whether as a 401(k) or in a tax-deferred IRA, you could end up paying substantial federal taxes.

There is a way to get around that or at least to minimize the taxes. You should consider taking distributions from either type of these retirement savings accounts. Then do what’s called a Roth conversion. Keep in mind that other conversion solutions exist to give you tax-free income. For example, you might research life insurance. The other thing is that if you wait until the age of 70 to claim your Social Security benefits, federal taxes might not apply at all.

Waiting to retire at 70 has a lot of advantages. Primarily, you’d have a lot more monthly income than if you retired in your 60s. However, if you can’t wait that long, start putting a plan in place now to withdraw any tax-deferred money from your 401(k) or IRA. You can use the funds as your primary income source until you begin collecting your Social Security benefits.

Complicating Factors

If you delay taking Social Security, but you have to dip into retirement accounts to make up for the lack of cash flow, this could be detrimental. This is because you have to pay your full income tax rate on the retirement account withdrawals. So it’s important to have a retirement plan analysis to see if it truly does make sense to delay. You can even do this yourself with retirement analysis software such as WealthTrace or Financial Engines. Both allow you to change when you take Social Security, your life expectancy, and various other assumptions to see if you should indeed delay.

The Bottom Line

As you can see, there are many decisions to make as you get closer to retiring. To ensure you choose what will benefit you the most, speak with a reputable financial advisor. That professional will explain how all these things work and then help you select a plan that’s the best specifically for you and your situation.

After all, no one has the same needs and wants. Since every situation is unique, you can’t go with a cookie-cutter solution. You need to look at all your options, consider them carefully, and then make the best well-informed decision possible. It’s not always easy to know what to do, which is why it’s essential to work with an experienced financial advisor.


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