Seasonal Strategies: Advantages of Delaying Social Security

The advantages of delaying your Social Security benefit:

1. You’ll Get a Bigger Monthly Social Security Benefit If You Wait Until 70

Claiming Social Security before you reach full retirement age (FRA) will result in a reduction in benefits — as much as 25% to 30% less than you would have received if you had waited. That reduction is permanent. Instead, if you wait to take your benefits until after your FRA, Social Security will add an 8% delayed retirement credit to your eventual monthly payout each year you hold off, up until age 70.

That’s a guaranteed return of 8% per year of deferral after your FRA, which could be more than you might receive with any other fixed products right now. It’s definitely more than the cost of living adjustments (COLAs) that Social Security beneficiaries have been getting for the past decade, which have averaged about 1.5% a year. Those COLA increases are not always enough to keep up with true inflation. And, when there is a COLA for Social Security, it may be coupled with a Medicare premium increase.

2. You May Draw Social Security Benefits for a Long, Long Time

Life expectancy is a critical factor in Social Security planning. Of course, no one can predict how long they will live, but according to the CDC’s most recent figures, the average American who makes it to age 65 can expect to live another 19 years. If your Social Security benefit at 70 is more than 75% higher than your benefit at 62, you’re going to have a lot more money to take care of your needs as you age.

Don’t forget that if you’re married, the lower Social Security payment will go away when one of you passes away. If the spouse with the greater Social Security wage history waits as long as possible to file for benefits, he or she will leave behind a bigger benefit for the surviving spouse to live on. Given that fewer and fewer Baby Boomers will have an employee pension to count on in retirement, it may make sense to maximize Social Security’s reliable income stream.

3. You Could Help Keep Your Tax Bill Lower

Many people don’t realize that they could end up paying federal income taxes on as much as 85% of their Social Security benefits.

If you don’t have much taxable income in retirement, you may not have to pay any federal taxes on your Social Security benefits. But if you’re like many Baby Boomers — you may have a hefty amount of your retirement savings in tax-deferred IRAs or 401(k)s — and the federal income taxes on those savings could be substantial. To help with that, you may be able to take distributions from your tax-deferred accounts (IRA, 401(k), etc.) now, and perform some Roth conversions, and/or perhaps conversions to other vehicles that can provide you with tax-free income, such as life insurance, so that Social Security benefits later (like after age 70) may not be taxed at all by the federal government.

If you can’t (or don’t want to) work any longer, you could create a plan now to carefully withdraw that tax-deferred money (from your IRA, 401(k), etc.) as an income stream early in retirement so that you can delay taking Social Security until you’re 70. Consult with qualified financial and tax professionals to see if any of these options are right for your situation. This may possibly eliminate or reduce required minimum distributions (RMDs), and their associated federal income taxes, at age 72.

The older you are when you file for Social Security benefits (until you reach age 70) the greater your annual payment for the rest of your life. The chart below shows how the annual benefit amount can change for a retiree who is eligible to receive $24,000 per year at the FRA* of 66. 

Chart displaying an estimate of your annual social security benefit based on the age you file for it:

Source: Chief Investment Office calculations based on Social Security Administration calculator at socialsecurity.gov/OACT/quickcalc/ (accessed October 2019).

* Full Retirement Age is the age at which a person may first become entitled to full or unreduced retirement benefits. These figures assume a Full Retirement Age of 66.

Adapted from Kiplinger and