When to start claiming Social Security benefits is the one question that often crosses people’s minds when they begin financial planning discussions. Unfortunately, there’s no universally applicable answer; it’s a nuanced matter that requires careful deliberation. However, there are several key considerations to think about before making this pivotal decision during your retirement years.
It’s worth noting that if you’re in your 50s and 60s you can reasonably expect to receive Social Security benefits in a form similar to the current system. Here are the top ten things to think about before you claim Social Security.
- Employment Status: The first question to address is whether you are still actively employed. As a general guideline, if you are of Social Security age but don’t require the benefits immediately and continue to work, it’s often advisable to delay claiming. Delaying not only avoids potential tax implications from additional income but also boosts your eventual benefit with an 8% annual increase for each year of delay.
- Financial Necessity: Consider when you truly need the Social Security funds. If you have a comfortable cash reserve to sustain you through the initial years of retirement without tapping into your investments, postponing your claim can be a prudent choice.
- Other Fixed Incomes: Assess your other sources of fixed income in retirement. Are you entitled to annuities, rental income, or traditional pensions? Understanding the balance between fixed and variable income sources is crucial in determining when and how much Social Security to claim.
- Investment Portfolio: The size of your investment portfolio plays a role. If you have substantial savings, you may have more flexibility in choosing when to begin claiming Social Security. Conversely, if your investments constitute your primary liquid assets, delaying Social Security may deplete your financial cushion.
- Asset Location: Consider where your investments are held. Assets within IRAs or 401(k)s are subject to higher tax rates when withdrawn than non-retirement investments. This tax implication can influence the timing of your Social Security claim if you’re seeking to optimize your tax strategy.
- Risk Tolerance: Your comfort level with investment market fluctuations and volatility matters. A cautious approach may lead you to delay your Social Security claim, while a more risk-tolerant attitude may encourage earlier action.
- Health and Longevity: Although there are no certainties, your current health status and family history can provide insights into your life expectancy. If you’re in excellent health with a family history of longevity, waiting to claim can lead to greater benefits over time.
- Spousal Age Difference: If you have a spouse, the age difference between you and your spouse is a critical factor. Remember that your spouse is entitled to the higher of their benefit or yours, should you pass away. Large age disparities between spouses can add complexity to the decision.
- Spouse’s Earnings and Benefits: Assess your spouse’s work history and potential Social Security benefits. Their earnings and benefits can significantly impact your overall Social Security strategy.
- Retirement Expenses: Finally, thoroughly understand your retirement expenses. How do you anticipate your spending in retirement, including any travel or other discretionary expenses? Your Social Security strategy should align with your expected retirement budget.
Social Security claiming is a significant financial move, and there’s no one-size-fits-all answer. It’s likely a good idea to discuss this with a financial planner. While it may be a brief conversation for some, it warrants extensive deliberation due to the high stakes involved.
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By Andrew Rosen, Contributor at Forbes
Published October 12, 2023