The below hypothetical scenario illustrates how total Social Security benefits can vary over time for two women who begin collecting at different ages. As you’ll note, it’s not until age 82 that the woman who delays Social Security accrues more total benefit.
Beyond your Social Security benefit, you’ll want to consider your other income sources and current financial position. Overall, what does your retirement portfolio look like? Are you comfortably covering your current expenses without this additional income? If you’re healthy and don't need the income right away, it may be wise to delay your benefits to age 70, when you’ll receive the maximum amount.?
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Plan for Social Security income in advance.
It’s smart to begin considering strategies for Social Security income five years before you plan to tap into your benefits. This gives you time to consider proactive measures, like a Roth conversion, to help structure income and mitigate the impact of taxes.
5. Your employment status
If you’re currently employed, it may make sense to hold off drawing Social Security until you stop working. Social Security is based on your highest 35 years of earnings, meaning that working longer could increase your benefit. Further, the federal program is structured to disincentivize simultaneously working and withdrawing Social Security prior to reaching your full retirement age. If you take Social Security before you reach age 66 or 67 and earn wages over a certain amount, it may lead to a decrease in your monthly benefit. Once you reach your full retirement age, you can take Social Security and work without reducing your benefits.
6. Your marital status
If you’re married or divorced, you’ll want to account for the impact that taking Social Security can have on the benefits of your spouse or ex-spouse. For example, if you and your spouse have a significant age or income gap, delaying benefits until the higher earner turns age 70 may be a smart move. This can help maximize the potential benefits for both spouses, since the higher earner's benefit won’t stop until the death of the surviving spouse.
7. Your taxes
Contrary to popular belief, Social Security benefits are considered taxable income and subject to federal taxes. When deciding when to take Social Security, you’ll want to holistically review your retirement income and consider how the benefits may affect your marginal tax bracket. It’s common for the additional income to push retirees into a higher tax bracket, which can lead to an increase in the overall amount that you pay for federal taxes and your Medicare coverage.
8. The external environment
Finally, you’ll want to consider what’s happening in the broader environment. As a federally administered benefit, Social Security is subject to ongoing regulatory oversight, and the program could change if Congress acts. If you’re farther away from collecting Social Security, potential changes — such as reduced payments or an increased full retirement age — are possibilities you may need to plan for should they be implemented.
Make the most of your Social Security benefits
Deciding when to start collecting Social Security benefits is a uniquely personal choice that will depend on a variety of factors. We can help you consider the financial risks and benefits before taking Social Security and create a sustainable retirement income strategy tailored to your needs.