Navigating the intricacies of retirement planning often feels daunting. Among the myriad decisions awaiting those embarking on this new chapter, choosing when to start Social Security benefits stands out as the most common question our clients approach us in their sixties.
A common misconception surrounding this choice involves the “breakeven” age for delaying benefits until 70. You would think that if the breakeven age for delaying Social Security is 82, the average life expectancy is 75 (male) and 80 (female)[1], delaying benefits doesn't make financial sense. This reasoning, however, overlooks an essential nuance in life expectancy statistics: once you've reached 60, your life expectancy surpasses 75 for men and 80 for women.
Understanding this nuance is vital. Life expectancy is an average, considering mortality rates at all ages. For example, this average includes people who die young from terminal illness. However, this figure changes as you age. For individuals who have reached their sixties and are in good health, their life expectancy extends beyond the general average often cited. Simply put, if you're 60, the odds are in your favor of living well past 75 (male) or 80 (female), and deciding to delay Social Security benefits until age 70 is a financially advantageous move for many.
The benefits of waiting until 70 to commence Social Security cannot be understated. First and foremost, by delaying, you stand to increase your monthly benefit significantly – approximately by 8%[2] for each year you wait past your full retirement age (which ranges from 66 to 67, depending on your birth year) up until age 70. This increase in monthly benefits offers a better standard of living and a more considerable buffer against inflation and unexpected expenses.
Moreover, the decision to delay taking Social Security benefits plays a crucial role in tax planning strategies during retirement. Withdrawals from retirement accounts, whether 401(k)s or IRAs, are typically taxed as regular income. By postponing Social Security benefits, you may have the flexibility to draw down these accounts at possibly lower tax rates before substantial Social Security payments kick in, potentially resulting in significant tax savings throughout your retirement.
Deciding when to begin Social Security is not a one-size-fits-all scenario. It entails carefully evaluating your financial situation, health status, and retirement goals. However, dismissing the option to delay benefits based on misinterpreting life expectancy could be costly. As you navigate these decisions, don’t hesitate to call our office if you want more personalized financial advice. In the end, understanding the true impact of your choices now can lead to a far more comfortable and secure retirement down the line.
[1] https://www.cdc.gov/nchs/fastats/life-expectancy.htm
[2] https://www.ssa.gov/benefits/retirement/planner/delayret.html