Timing Social Security and IRA Distributions
Retirees often claim Social Security before reaching full retirement age and leave tax-deferred IRAs untouched until age 70½ , when they must start taking required minimum distributions (RMDs). In fact, about 75% of current Social Security recipients claimed early benefits before age 66.1
Some retired couples might be better off with the opposite approach: taking IRA withdrawals in their 60s in order to delay Social Security until age 70, when benefits would reach their maximum payout.
Although you may not be counting on Social Security to survive, the lifetime benefits you receive could add up to a meaningful percentage of your retirement income. In the long run, you could miss out on thousands of dollars in benefits if you rush to file before carefully considering your options.
Boost Lifetime Benefits
Social Security benefits can be claimed by eligible workers at any age between 62 and 70. Retired workers can claim a reduced (70% to 75%) benefit at age 62, but eligibility for the full retirement benefit ranges from age 66 to 67 (depending on birth year). For each year Social Security is delayed after full retirement age, the annual benefit grows automatically by about 8%, up to age 70.2
Thus, someone who is currently eligible for an $1,800 monthly benefit at age 62 could receive $2,400 at full retirement (currently age 66) or as much as $3,168 by delaying benefits to age 70. In this example, the individual who files at age 70 instead of age 62 would receive more than $16,000 of additional income every year for the rest of his or her life. Actual results will vary.
Plan for Longevity
In theory, benefit calculations are actuarially neutral, which means that recipients who live an “average” life span should receive the same lifetime Social Security income regardless of when they begin collecting benefits. However, you may want to consider the possibility that you and/or your spouse could live well beyond that “breakeven” point.
Delaying benefits is more likely to pay off for women and married couples. If the higher-earning spouse waits to file for the highest possible Social Security benefit, his or her spouse could eventually receive a higher survivor benefit after the death of the high earner.
Consider Future Taxes
If retirees delay filing for Social Security and receive income from IRA withdrawals and taxable investments in their early retirement years, they might pay more taxes initially but less over the long term. Even though retirees who live mainly on Social Security income in the early retirement years might pay little or no income taxes on their benefits, after they reach age 70½ and must start taking RMDs, the income tax liability on IRA income and Social Security benefits combined could be more onerous.
Distributions from traditional IRAs are taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty, with certain exceptions.
Preserve Your Portfolio
The funds that you will need during the early years of your retirement should generally be invested conservatively. Otherwise, your nest egg could be depleted if you are forced to sell too many assets during a down market.
The age at which you sign up for Social Security is an important personal decision. It should generally be based on many factors including your marital status, health, work situation, financial resources, tax burden, and retirement goals.