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The Benefits of Delaying Social Security

Have you thought about what type of lifestyle you want to have during retirement? It’s time to start thinking about it, and what type of financial decisions need to be made to help you lead the life you want while retired. A recent study, published on Market Watch of over 15,000 consumers found that the average American will run out of retirement funds, other than state and occupational pensions, around 14 years into retirement.

The same report came to the conclusion that the average international retirement extends to about 18 years, while retirement savings only last about ten years. While modern science and medicine have helped extend our lives, we clearly are not prepared for this extended stage of our lives. One solution for prolonging the length of retirement funds and maintaining decent standard of living in retirement is to put off receiving Social Security benefits.

Postponing Social Security benefits is best for those with an estimated wealth between $200,000 and $600,000. One of the reasons to delay collecting Social Security benefits is to avoid excessive taxation. This heavy taxation is known as the ‘tax torpedo’ and occurs when retirement withdrawals from an IRA, cause heavier taxation on Social Security benefits. An example given in the Mary Beth Franklin demonstrates this point more clearly in her article “Avoiding a retirement ‘tax torpedo.’”

A single retiree receiving $35,000 per year in income plus Social Security benefits is in the 25% tax bracket. If this retiree wants additional spending money amounting to $750 they would assume they need to withdraw $1,000 from their IRA. This would increase the retiree’s taxable Social Security benefits to $850. Thus, now the retiree is paying taxes on $1,850, which increases the tax rate to 46.25%, an 85% increase in tax rate. This is an extremely high tax burden to bear during retirement.

In addition to the savings on taxes, living off personal savings in early retirement helps to extend the longevity of your retirement portfolio. The study “How the Social Security claiming Decision Affects Portfolio Longevity” found that delaying benefits from age 62 to 64 would extend one’s retirement portfolio for 1+ years, delaying until age 66 would extend the portfolio and additional 4+ years, and delaying until 68 would extend a retiree’s portfolio and additional 7+ years.

Also, not only is the extension of the portfolio reason enough to delay benefits, but the monthly amount you receive in benefits will increase by holding off a few years. Social Security benefits are adjusted annually, to keep up with the cost of living. Putting off benefits for even a year or two will ensure the retiree starts out at a higher amount, which means each cost of living adjustment (from 5 reasons to delay social security) will be higher, as it is based off a percentage of the benefits received.

As more and more of us are living longer into our retirement years, it should be looked at as a time of enjoyment. Unfortunately, the increasing cost of living along with increasing healthcare costs, and inadequate savings, can make retirement prospects scary. However, it does not have to be. By delaying Social Security benefits, and dipping into your retirement portfolio early on, you can help to ensure the longevity of your funds along with a proper standard of living so you can enjoy the retirement you deserve.

Tips for Getting Retirement Ready

  • To ensure you’re in a position to delay Social Security benefits, start saving early. The earlier you start saving, the more time you’ll be able to reap the benefits of compound interest. An easy way to boost your retirement savings is to take advantage of employer 401(k) matching.
  • Work with a financial advisor. According to industry experts, people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Tiffany Patterson
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