Should You Maximize Social Security? Why It May Make Sense To Delay Claiming Your Social Security Benefit!
***Transcript***
(Edited for grammar and clarity.)
Deciding when to claim Social Security could be one of the most significant decisions people make regarding their retirement. And often, people reflexively claim as early as they can. But is that the right decision for you?
In this video, I'll discuss seven reasons why it may make sense for you to delay claiming Social Security.
Make sure you stay to the end while I discuss two important resources you should have to help you make the decision that is right for you.
Hi, my name is JP Geisbauer, founder of Centerpoint Financial Management. I'm a Certified Financial Planner professional (CFP®) and a Certified Public Accountant (CPA), and this channel is dedicated to helping diligent savers maximize their lives and minimize their taxes as they transition into retirement.
People can typically claim Social Security benefits between the ages of sixty-two and seventy. So why would someone wait until age seventy to claim their benefits?
1. Delaying Social Security Will Increase Your Monthly Benefit
Delaying Social Security will increase your monthly benefit. For those born in 1960 and later, sixty-seven is considered full retirement age.
You will receive one hundred percent of your primary insurance amount at that time. If you claim earlier than sixty-seven, the monthly benefit will be reduced. For example, if you claim at age sixty-two, the benefit will be reduced to seventy percent. If you claim later, the monthly benefit will be increased. For example, if you wait until age seventy, the monthly benefit will increase to one hundred and twenty-four percent. It's important to note that you are foregoing the monthly benefit for eight years to go from the lowest to the highest amount. If this is your primary consideration, how do you know if waiting is the right for you?
I made a video on a Social Security break-even analysis. Here is a link to that page.
2. Delaying Social Security Will Increase Your Cost Of Living Adjustment (COLA)
Every year, the Social Security Administration reviews inflation data and, based on that data, might issue a cost of living adjustment. Here are the cola adjustments since 1986. Over the last 20 years, the average cost of living adjustment has been approximately 2.6%.
You might be asking yourself, "If everyone gets the same percentage increase, how can delaying increase my benefit?"
Let's run through a quick example. Let's say we have two Social Security recipients. One is entitled to a $2,000 monthly benefit, and the other receives $3,000. At the onset, the difference in their monthly amount is $1,000.
If we were to apply the average annual cost of living adjustment for the last 20 years, or 2.6%, to the next 20 years, their monthly benefits would grow to $3,342 and $5,013, respectively.
That is the difference of $1,671 per month, $671 more than when they started 20 years ago.
As you can see, starting with the higher monthly benefit, the COLA amounts compound more efficiently. This is a direct result of delaying Social Security.
3. Delaying Social Security Can Increase Spousal Benefits
Spousal benefits can be a complicated subject worthy of its own in-depth analysis. But it's important to remember that the lower-earning spouse can claim benefits based on the higher-earning spouse's earnings record. Suppose you are in a situation where there is a significant earnings disparity and age gap between the two spouses. In that case, the increase in benefits to the younger, lower-earning spouse can be substantial. So, make sure any claiming strategy considers spousal benefits.
4. Delaying Social Security Can Help Reduce Income Taxes
Up to 85% of your Social Security benefit can be subject to income taxes. And the earnings thresholds are low at $25,000 for single filers and $34,000 for joint filers (as of 2024). If you are collecting Social Security and still working, more of your Social Security might be subject to the higher income tax rates. Make sure you model out with your CPA how much of your Social Security benefit will be taxed if you continue to work.
A special note. If you are under full retirement age, continuing to work, and collecting Social Security, you might be subject to the earnings test. This means that one dollar in benefits is withheld for every two dollars earned over a certain threshold. In 2024, that threshold is just over $20,000. These rules are fairly complicated, and the reporting is clunky. So, if you're under full retirement age and still working, delaying Social Security will help you avoid these rules.
5. Delaying Social Security Allows You To Save More For Retirement
If you continue to work, then you can continue to save for retirement. So, if you feel like you don't have enough saved for retirement, don't just collect Social Security. Continue to work to sock more away for your retirement.
6. Delaying Social Security Can Create Flexibility
Generally speaking, if you claim Social Security, you're stuck with that decision. You are allowed one withdrawal during your lifetime, which may allow you to claim later. But this must be done within the first twelve months of claiming, and you will be forced to pay back all of the benefits you have received. So, this process is far from cheap and easy.
By not claiming Social Security right away, you can do it in the future. This creates an option for you to do so when you are ready.
7. Delaying Social Security Gives You Piece of Mind
If you haven't had much time to give this enough thought, delaying Social Security can provide peace of mind as you try to figure things out.
This is an important decision. In fact, it's one of the biggest decisions most people make regarding their retirement. If you are still deciding what is right for you, please take your time. Don't just reflexively claim. Make sure you are making the decision that is right for you.
As promised, I want to discuss the two important resources mentioned in this video.
Resource 1
If you haven't done so already, I encourage you to go to ssa.gov. You can create an account there and download your personal Social Security statement. There is much valuable information on that statement and on the s s a dot gov website. So, invest the time to familiarize yourself with all of this information.
Resource 2
Social Security is only one component of a comprehensive retirement plan. I wrote an e-book called 8-Step Retirement Roadmap, which goes into the different components of a comprehensive retirement plan.
Please download a free copy. You can find yours at here.
While there's no one-size-fits-all strategy to claiming Social Security benefits, delaying your claim offers numerous advantages: from increasing your monthly benefit and providing extended financial security to creating flexibility and peace of mind in your retirement planning.
Refrain from reflexively claiming early. Take time to review your options, consult with your financial advisor as needed, and make an informed decision that aligns with your long-term financial planning goals.
Well, that should do it for today.
Again, my name is JP Geisbauer, founder of Centerpoint Financial Management.
If you enjoyed this content, please hit like or subscribe.
Thanks for watching, and I'll see you next time.
About the Presenter:
JP Geisbauer is a Certified Public Accountant, a Certified Financial Planner ®, and the founder of Centerpoint Financial Management, LLC, a financial planning, investment management, and income tax planning firm located in Irvine, CA. JP Geisbauer is dedicated to helping California-based business owners and executives transition into retirement. He has been quoted in many news outlets including Forbes, Newsweek, US News & World Report, MarketWatch, YahooFinance, CNN and NerdWallet.
Need help with your transition into retirement? Schedule a complimentary 30-minute call with JP here.
DISCLAIMER:
This article is for general information and educational purposes only. Nothing contained in this article constitutes individual financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, consult with your own financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.