Can You Afford to Delay Collecting Social Security Until 70?
Regarding Social Security, the timing of when you choose to collect can dramatically impact cash flow in retirement and a draw-down strategy for your other retirement accounts. Here, we’ll look at what’s involved in delaying collecting your social security and when it's advantageous.
Social Security Overview
Typically, the age you will hear when discussing social security benefits is 62. This is the earliest age you can start to collect. If you start collecting at this age, remember that the amount will be slightly less than the total amount.
This is because if you wait until 70 years old (full retirement age), you will receive the full benefits of Social Security.
When it comes to benefit reductions, the Social Security Administration provides the following chart (based on an estimated monthly benefit of $1000 at full retirement age):
You can use this chart to estimate where you stand based on your numerical age and retirement age. Beyond this, you’ll want to weigh the pros and cons of delaying social security.
Pros and Cons of Delaying
Some of the pros for delaying social security include:
- A potential 8% return earned when you delay - that’s a significant amount! In fact, for 2023, retirees are looking at an 8.7% cost of living (COLA) adjustment.
- Receiving a more significant amount of money - not just at the beginning of withdrawal, but as time goes on, that higher amount will sustain itself
- Tax benefits - you may gain an advantage regarding taxes on your Social Security. You will pay tax on only 85% of your Social Security benefits if you meet specific requirements depending on how you file and your (single or combined) income. You can find more specific tax scenarios covered by the IRS here.
Some of the cons of delaying social security include the following:
- Life expectancy - you may be delaying hoping for a bigger payout, but the truth is, depending on your health and life expectancy, delaying may not be the best move. It may be difficult to assess, but you’ll want to consider your health when making this decision realistically.
- You'll have to cover your retirement costs on your own until 70 - sure, the idea of delaying sounds nice, but do you have what it takes to cover the lifestyle you desire in the meantime?
- It may affect your spouse negatively - If one spouse plans to delay until 70, their partner can claim a benefit on their work record sooner. But they will be eligible for a spousal benefit once their spouse turns 70 and applies for their benefits. If you’re married, you’ll want to consider this decision as a partnership.
Determine if you can afford to delay
First, understand your cash flow needs when determining if you can afford to delay your social security.
Let’s explore an example with some actual numbers:
“Suppose you'll receive $1,500 monthly from Social Security at age 66. Each year, that $1,500 a month can be expected to go up a little if the cost of living measured by the consumer price index increases.
Now, let’s say that you'll live another 20 years. How much would that income stream be worth?
You can answer that question by taking the present value of that stream of cash flow. To pay yourself $1,500 per month, increasing by 2% per year for 20 years, you'd need $263,977 in the bank earning a 5% annual rate of return. You'd need $348,535 if you are going to live for 30 years.
Assuming that you're using safe investments, earning 2% instead of a portfolio earning 5%—the same rate of assumed inflation at which your income increases each year—you would need $352,941 in the bank for the income to last for 20 years. You'd need $529,411 for it to last 30 years.”
This is an excellent example of taking a practical look at what amount you’ll need to live on, how COLA, inflation, and rates factor in, and looking at the big picture- even decades ahead.
Looking at Your Accounts
When determining if you can afford to delay your Social Security, you’ll want to check your credit and debit card statements for the past few years and take averages. Get a clear understanding of where you stand.
Consider expenses that may be new to you in your retirement, such as large purchases, travel, etc. You should create a draw-down or withdrawal strategy based on your current accounts.
Some draw-down strategies include:
- The 4% rule
- Fixed-dollar withdrawals
- Fixed-percentage withdrawals
- Systematic withdrawals,
- And buckets.
These have advantages and disadvantages, so work with your financial advisor to determine what works best. When applicable, we encourage using the bucket strategy, as it helps break down short, medium, and long-term financial goals.
Beyond your accounts, also consider the details of your retirement. Are you aiming to retire at a specific age? What age is that? Will you keep working part-time to cover expenses? Will you work full-time or transition to consulting? These are the questions that only you can answer.
"Three-Legged Stool" concept
With all of this in mind, there’s one more facet regarding Social Security: Social Security is only one part of a metaphorical, financial "three-legged stool". The three legs on this stool are your pensions, savings, and Social Security.
Be sure not to view Social Security in a vacuum. Your finances are more nuanced than this, and factoring in all three aspects mentioned above will be crucial here.
It’s worth noting that, unfortunately, Social Security has recently been referred to as one of the weaker legs of the stool in our current economic climate. Some have even predicted that the system could run out of reserves as early as 2033.
It’s a bit bleak to consider, but essential to be realistic. Use your intuition about your financial goals and work with your financial planner to see how this may affect you.
Knowing how and when to leverage your stool's other "legs" can also help you. With Social Security becoming a leg of the stool you might not want to lean on, so to speak, consider ways to strengthen the other legs.
This can look like taking advantage of an employer match or diversifying your portfolio. Get creative and use what’s available to you to set yourself up for success so that if one leg happens to “fall,” you have a backup for the future.
Need Help Deciding?
Now that you know the pros and cons and what’s involved in delaying your Social Security, you may wonder if you can afford to delay and if it’s the best choice.
Our financial planners have you covered. Contact us today to work with a financial planner to see if delaying your social security is right for you.