Making the most of your Social Security retirement benefits can make retirement much more enjoyable, and maximizing your benefits can come down to just one decision. When do you decide to claim social security?
Deferring until age 70 will be an excellent choice for many retirees who can take advantage of deferred retirement credits while positioning themselves to minimize taxes on their benefits.
A 24% boost just for waiting
If you can wait until you’re 70 to claim your benefits, you’ll automatically get a boost in your monthly checks.
Each year you wait past full retirement age — 67 for most readers — earns you an 8% increase on your Social Security benefits. Wait three years and you’ve earned a 24% bonus.
That said, you give up three years of benefits to get that boost in monthly benefits, but it turns out to be a good deal.
First, Social Security is tied to inflation. As such, it serves as an excellent hedge against inflation. Those larger monthly checks also get larger cost-of-living adjustments (COLA) than if you had previously claimed (on an absolute basis). For example, if you qualify for a monthly benefit of $1,000 at full retirement age, a 5.9% cost-of-living adjustment, as those Social Security recipients received in 2022, would add $59 each month to your add check. But if you wait until 70 to max out your $1,240 monthly benefit, the same 5.9% COLA would run you an extra $73.
Second, those extra years give you time to optimize your retirement accounts to keep your taxes lower in retirement.
Avoid the Social Security tax
The income limits for Social Security taxes were set in 1983 and have not been adjusted for inflation since then.
That means you don’t have to make a lot of money in today’s dollars before you’re taxed on your Social Security benefits. But if you do some careful planning before you start collecting Social Security, you can keep your tax bill to a minimum.
Importantly, withdrawals from a Roth retirement account do not count against your income. So if you move a significant amount of assets from a traditional retirement account to a Roth account in your late 60s, when your income is low, you can retire tax-free for years into your 70s, 80s, and beyond.
Roth conversions have the added benefit of lowering your required minimum benefits (RMDs), which begin at age 72. If your RMD is higher than necessary, it could cost you tax dollars.
Long-term tax planning can lead to significantly greater Social Security benefits when you factor in your final tax bill.
Postponing to 70 is not for everyone
There are several instances where delaying until age 70 doesn’t bring the added benefits you’re hoping for.
First of all, if you depend on Social Security to meet your retirement needs, and claiming early will help you meet your budget, don’t wait any longer. You are less likely to need to optimize your portfolio to minimize taxes in that situation, and the benefits of doing so will not outweigh the immediate income needs.
Second, if you plan to receive spousal support, going past full retirement age will do you no good. Spousal benefits do not provide deferred retirement credits — they are up to half the amount of the spouse’s primary insurance at full retirement age.
The third case is not so common. A person receiving the survivor’s benefit (for a deceased spouse) is eligible to apply for their own benefit and their survivor’s benefit separately, although they can only receive one at a time. That opens the door to claim one benefit early and the other when the value of the benefit reaches its maximum.
Not just patience, planning
While waiting until age 70 is one of the best ways to maximize your Social Security checks, simply waiting to claim your benefits isn’t enough.
If you don’t take the steps to plan your financial future, you will get sub-optimal results. That’s why it’s important to take the steps to plan how you’ll manage your finances at each stage of retirement: before and after you claim Social Security, before and after you start making required minimum distributions, etc.
If you want a richer monthly Social Security payout, earn those deferred retirement credits and keep taxes on them as low as possible.