Getting the most out of your Social Security retirement benefit could help make your retirement much more enjoyable, and maximizing your benefits could come down to just a single decision. When do you decide to claim Social Security?
Delaying until age 70 will be an excellent choice for many retirees who can benefit from delayed retirement credits while positioning themselves to minimize the taxes on their benefits.
A 24% boost just for waiting
If you can wait until age 70 to claim your benefits, you’ll automatically get a boost in your monthly checks.
Every year you wait past your full retirement age — 67 for most readers — will earn you an 8% increase in your Social Security benefit. Wait three years, and you’ve earned a 24% bonus.
That said, you’re giving up three years of benefits in order to get that boost in monthly benefits, but it turns out to be a pretty good deal.
First of all, Social Security is tied to inflation. As such, it serves as an excellent hedge against inflation. Those bigger monthly checks will also get bigger cost-of-living adjustments (COLA) than if you claimed earlier (on an absolute basis). For example, if you qualify for a $1,000 monthly benefit check at full retirement age, a 5.9% cost of living adjustment like the one Social Security recipients received in 2022 would add $59 to your check each month. But if you wait until 70 to max out your monthly benefit at $1,240, the same 5.9% COLA would give you an extra $73.
Second, those extra years give you time to optimize your retirement accounts to keep your taxes lower throughout your retirement.
Avoid the Social Security tax
The income limits on Social Security tax were set in 1983, and they haven’t been adjusted for inflation since.
That means you don’t have to earn much money in today’s dollars before you get hit with taxes 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 don’t count toward your income. So, moving a substantial amount of assets from a traditional retirement account to a Roth account in your late 60s when your income is low could set you up for years of tax-free retirement in your 70s, 80s, and beyond.
Roth conversions have the added benefit of reducing your required minimum distributions (RMDs), which start at age 72. If your RMD is higher than you need it to be, it could end up costing you money in taxes.
Long-term tax planning can lead to significantly larger benefits from Social Security when you factor in your final tax bill.
Delaying until 70 isn’t for everyone
There are several cases where delaying until age 70 won’t provide the extra benefits you’re hoping for.
First of all, if you’re relying on Social Security to meet your retirement spending needs, and claiming earlier helps you make your budget, then don’t delay. It’s less likely you’ll need to optimize your portfolio to minimize taxes in that situation, and the perks from doing so won’t outweigh the immediate income need.
Second, if you’re planning to take a spousal benefit, you won’t gain anything from delaying beyond full retirement age. Spousal benefits do not earn delayed retirement credits — they max out at 1/2 of the spouse’s primary insurance amount at full retirement age.
The third case is not as common. Someone taking 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, it’s not enough to simply wait to claim your benefits.
If you don’t take the steps to plan for your financial future, you’ll end up with suboptimal results. That’s why it’s important to take the steps to plan how you’ll manage your finances at every stage in retirement: before and after claiming Social Security, before and after you start making required minimum distributions, etc.
If you want a richer monthly Social Security payout, earn those delayed retirement credits and keep the taxes on them as low as possible.