Should You Delay Your Social Security?

You’ll generally receive more money in retirement if you delay starting your Social Security benefits. The significant cost-of-living adjustment (COLA) for the program scheduled for next year makes the wait much more worthwhile.

So, let’s explain why: The COLA increase, which is 8.7% for 2023, is still considered in determining how much you are eligible to receive until you turn 62, even if you don’t accept benefits. Since interest accrues over time, deferring your distribution until full retirement age (depending on when you were born, is between 66 and 67) will improve your final payout. When you turn 70, the benefits increase comes to an end.

COLAs accentuate the difference between early and late claims. Savvy Social Security Planning for Boomers was written by certified financial adviser Elaine Floyd in 2013 when the COLA was only 1.5%. “One would expect all Social Security recipients to celebrate the announcement of a sizable cost-of-living adjustment (COLA).” 

Understanding how to maximize a Social Security income is crucial because it is paid out for the rest of a recipient’s life and adjusted for inflation. For the majority, if not all, other sources of income, the same cannot be stated. Social Security provides approximately half of elderly Americans with at least 50% of their family income. It accounts for at least 90% of the revenue for nearly one-fifth of individuals aged 65 and over.

Understanding how benefits are determined will help retirees better appreciate how much they can save by delaying. The Social Security Administration considers a worker’s 35 years of highest earnings and accounts for inflation when calculating benefits. That gives us a place to start when estimating what a typical monthly payout may be.

The benefit is then calculated using a formula to determine what it would be if received at full retirement age (FRA). When someone turns 62 and becomes eligible to begin receiving benefits, the amount known as the primary insurance amount may be reduced by as much as 30%. 

Every year, the primary insurance amount is increased by any COLA change by compounding it. Until age 70, the longer a retiree waits to begin receiving benefits after achieving full retirement age, the more credits would be subtracted from the original insurance sum.

Consider a retiree who is 64 years old and of full retirement age and qualifies for a primary insurance sum of $3,000 per month. If she hadn’t started collecting benefits in 2016, when the COLA was 5.9%, she would have received $3,177. Next year, it will be $3,453 (with the latest COLA increase applied to the higher inflation-adjusted amount). The longer she waits, the more COLAs she will accrue. Any credits will increase the amount for deferring benefits past the age of full retirement to 70. Suppose she waits to begin receiving benefits until she is 70. In that case, her monthly payment (excluding any COLAs for years after this one) will be $4,374.

The tax savings are a further advantage of delaying Social Security, especially with a higher COLA. Yes, many beneficiaries must pay taxes on their Social Security benefits. And up to 85% of Social Security benefits may be taxed for people with additional retirement income sources like 401(k) or IRA accounts. However, delaying payments and ultimately receiving a larger lifetime payout means those retirees won’t need to use their accounts for as much cash. As a result, the taxable portion of Social Security income will decrease.

By delaying filing until age 70, a retiree can reduce the taxable portion of benefits from 85% to 19.5%, according to Bill Reichenstein, Chief of Research at Social Security Solutions. The tax burden will be significantly lower as a result of this than it would be if she began receiving benefits at age 66.

There are some people for whom deferring benefits won’t make sense, even with a greater payout and lower tax burden. Suppose they aren’t married and aren’t worried about their spouse’s benefits. In that case, those with a terminal disease or a lower life expectancy may want to start collecting what they can as soon as possible.

Consider the age at which a retiree’s deferral of payments becomes profitable. According to Reichenstein, you usually have to live to be 82.5 years old to gain from delaying till age 70. Those who have passed away before that point would have been better off claiming benefits when they reached full retirement age. But who knows? Making this estimate is unpleasant and challenging.

Others would counter that delaying taking Social Security benefits would be unwise because the program is in peril. Recent forecasts indicate that the trust fund will no longer be able to provide full benefits beginning in 2035. But based on what has happened in the past, any changes to stabilize finances would probably focus on changing rules for younger people. The reason is that they have a long time to work, unlike people who are about to retire and start getting benefits. Therefore, if you’re in your sixties and can wait, do so.

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Mark, a lifelong Tulsan graduated from Westminster College, Fulton, Missouri with a Bachelor of Arts in Accounting. Mark served in the United States Army as a Captain in the 486th Civil Affairs BN. Broken Arrow, Oklahoma and retired in 1996. Mark is married to his high school sweetheart Jenny and has four beautiful children. Mark’s passion for his work, which includes over 20 years in the Financial Industry started as an Oklahoma State Bank Examiner. Mark examined banks throughout Oklahoma gaining a vast knowledge and experience on bank investments, small business and family investments. Mark’s experiences include being formally trained by UBS Wealth Management, a global investment firm where he served as a Financial Consultant specializing in Wealth Management for individuals & families. Mark is a licensed Series 24 and 28 General Securities Principal and an Introducing Broker Dealer Financial Operations Principal. Additionally, Mark is a Series 7 and 66 stockbroker and Investment Advisor focusing on market driven investments for individuals, businesses and their families.

Mark specializes in providing financial knowledge, ideas, and solutions for federal employees, individuals, families and businesses. We serve as your advocate, and assist you in the design and implementation of financial strategies while providing the ideas to maximize your security and wealth. Our goal is to give you maximum control of your financial future. We provide the expertise to help you with personal issues such as: practical tax Ideas, risk management, investment solutions, and estate preservation.

Additionally, we’ve counseled hundreds of employees on their transitions from careers in federal government, and private industry to their next life stage, whether that is retirement or a second career. We specialize in devising strategies that roll your TSP, 401(k), pension plan, to a suitable IRA to meet your objectives.

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