Sarasota, FL / Bradenton, FL

The Pros and Cons of Delaying Social Security

In our previous article, we explored the expectation of retirement income sources compared to the reality. As it turns out, many Americans depend on Social Security more than they planned, retire earlier than planned, and receive a smaller Social Security benefit each month as a result. However, maybe some people claim their Social Security benefits too early because they don’t understand how it fits into a lifelong financial plan or the benefits of delaying it as long as possible.  

In this article, we will explore the benefits and downsides of delaying your Social Security benefits so you don’t risk your financial security or needlessly leave money on the table.

The Pros of Delaying Social Security

1. Your Monthly Benefit Will Be Higher

The full Social Security claiming age is 67 for those born in 1960 or later. However, you’ll receive an additional 8% annually for each year you delay, finally maxing out at age 70, at which point you’ll receive a 124% benefit – for the rest of your life. Think of that 8% as a guaranteed return on investment – why turn it down?

Source: SSA.gov

Of course, it’s not that simple. You’ll only want to delay benefits if you can easily cover the gap with your investments and other income sources. For example, if you’re 68 and the markets have crashed, you might not want to touch your investments, which could lead to running out of money sooner than expected. In such a case, claiming Social Security may be the winning move. 

Also, the way the Social Security Administration (SSA) calculates things is that, in theory, at least, it doesn’t matter when you actually claim your benefits, as the total dollar amount you eventually receive will be more or less the same. By claiming early, you receive a smaller monthly benefit for a greater amount of years. By claiming late, you get a larger monthly payment for fewer years. 

However, the way things are playing out with medical advancements, you may live a much longer life than even the SSA expects, and in those final years of life, it would be nice to have a larger monthly payment.

2. Your COLA Will Be Higher

The Social Security Administration announces the cost-of-living adjustment (COLA) for all current beneficiaries each year. Since the adjustment is a percentage, the higher your existing benefit is, the more significant your increase will be.

For example, 2024’s COLA increase is 3.2%. So, a person getting $1,500 a month in 2023 would see their payment rise by $48, totaling $1,548 per month in 2024. Meanwhile, a recipient getting $2,000 per month would experience an increase of $64, bringing their new monthly total to $2,064. 

These COLA increases are cumulative, meaning that delaying your Social Security benefits gives you a higher initial amount, resulting in more significant incremental gains over time.

3. It May Benefit Your Tax Situation

Delaying Social Security benefits may even benefit your tax situation, especially if you have sizeable savings in tax-deferred retirement accounts such as a 401(k) or IRA. Once you reach 73, you’ll be forced to withdraw required minimum distributions (RMDs) from those accounts, which could push you into a higher tax bracket and cause up to 85% of your Social Security benefits to be taxed. 

However, by spending down those accounts in your 60s while delaying Social Security, you can reduce your future RMDs, which are taxed at 100%, and replace that income with lower-taxed Social Security benefits in your 70s and beyond.

However, it’s important to consult with a financial advisor to determine the best strategy for your individual circumstances.

4. You Can Change Your Mind

Opting to take Social Security at age 70 doesn’t permanently lock you into that decision. Should you reconsider, you have the option to request a six-month retroactive lump sum payment after reaching your full retirement age. This allows for some flexibility if you experience regret about delaying your claim or need a lump sum of cash. 

However, be aware that choosing a retroactive payment will adjust your monthly benefit amount going forward, as it will be calculated as if you had started your benefits six months prior to your actual claim date.

5. Your Spouse Can Get a Higher Benefit

If your spouse has a lower earnings history, holding off on claiming your Social Security benefits can make a significant difference for them as well. This spousal benefit could be up to 50% of your benefit at your FRA.

Unfortunately, the spousal benefit doesn’t increase due to the delayed retirement credits you might gain by waiting to claim your benefits past your FRA. So, while delaying your benefits enhances your monthly payment, the spousal benefit remains capped at what it would be based on your benefit amount at your FRA.

Additionally, if your spouse claims your earning history earlier than their own FRA, they’ll receive a reduced benefit.

Finally, you’re also potentially raising the survivor benefit available to your spouse if you were to pass away first, improving the financial stability of your spouse in such a difficult time.

When Not to Delay Social Security

1. Health Reasons

Unfortunately, not all of us will live to the ripe age of 100. If you’re 62 and your health is already failing, why delay? You could probably use the extra money, and if you don’t feel you’ll make it much beyond Full Retirement Age or even to it, then there’s no reason to pass on claiming it. On top of that, there’s always the risk of an accident that can lead to sudden death. 

Delaying is a gambit, and having the comfort of claiming what is owed to you as soon as possible likely outweighs any calculated financial reasons to delay, with the possible exception of a higher spousal claim.  

If it makes sense for your spouse to claim your earning history, then delaying Social Security would lead to a greater net benefit for your spouse upon your passing.

2. Will Social Security Even Be Around?

Social Security is a highly politicized social program, and there is no guarantee that it will not be defunded in the future or outright abolished. If this is one of your primary concerns, you may as well start claiming early. Also, it would be prudent to structure your finances under the assumption that Social Security won’t be a viable source of income in the future.

3. You Need the Money

If you’re struggling to pay the bills, maybe delaying benefits isn’t the right choice. And there’s nothing wrong with that – it’s the reason we have Social Security in the first place. 

Final Thoughts

Choosing when to claim Social Security should be part of a well-thought-out financial plan, not a snap impulse decision. However, there are multiple factors beyond financial needs that should be considered before making a decision, such as your longevity, the political situation, and your spouse’s Social Security status. In the ideal scenario, you could delay until age 70 and live a long, full life with the maximum possible benefit. But, of course, life isn’t always ideal. 

We’d be happy to discuss your thoughts and concerns regarding your Social Security claiming strategy and help you determine your best course of action. Just click the button below to set up an appointment!

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The scenario mentioned in this presentation is not an actual client experience. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this presentation.

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

Search