Many seniors will inevitably become heavily dependent on Social Security in retirement. That’s because plans to build a large nest egg can often go awry.
Just think about how inflation wreaked havoc on consumers in 2022. No doubt many employees have cut back on IRA or 401(k) plan contributions this year because of inflation. But the reality is that in any given year – or series of years – you could find yourself in a situation where you can’t fund your nest egg. And that’s why you may end up becoming more dependent on Social Security than expected.
In fact, you may be tempted to do whatever you can to squeeze more money out of Social Security. And that may mean delaying your submission.
This may result in a higher monthly payment. But that doesn’t automatically make a deferred submission your best choice.
Persistence is not always possible
You are entitled to your full monthly Social Security benefits based on your income history at full retirement age (FRA). And that age varies based on your year of birth.
Anyone born in 1960 or later is looking at a 67 year FRA. If that’s your FRA, delaying Social Security until age 70 means a 24% increase in benefits — not too shabby. (To be clear, 70 is the latest age you can accrue credits for a delayed filing. If you sign up for Social Security at age 71, you get the same benefit you would have received at age 70. )
At first, a delay may seem like an excellent idea. But you shouldn’t automatically assume that delaying your filing is your most financially rewarding bet. The reason? You don’t know how long you will live.
In order for a delayed filing to make financial sense, you need to calculate your breakeven point. With an FRA of 67, age 82 1/2 is your break-even age in the context of a delayed filing at age 70. That means if you don’t live to age 82 1/2, you will incur a financial loss from filing for Social Security at 70.
Of course, a delayed filing doesn’t have to mean you have to wait until you’re 70 years old to sign up for Social Security. You can defer your application for a year and increase your monthly benefit by 8%, changing your break-even age.
But either way, don’t let your desire to get more out of Social Security lead you to delay your filing without crunching the numbers first. You might like the idea of a lifetime higher monthly benefit. But if you pursue that, you could end up shorting your total lifetime Social Security payout.
Stay focused on savings
If you’re concerned that you’ll need a lot of Social Security income to compensate for a smaller nest egg, you might want to consider changing your approach to retirement savings. That could mean changing your spending to free up more money for your IRA or 401(k), or it could mean investing your nest egg differently to increase your returns. Remember, not every year will be as bad as 2022 with regard to inflation, so don’t assume you won’t have opportunities to boost your savings rate.
It’s certainly not a bad idea to think about different filing strategies before claiming Social Security. But don’t assume that a deferred submission is automatically the ideal way to go.