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Claiming Social Security: Risk vs. Reward

Risk rewardWaiting to take Social Security can be a risky proposition.

You may be asking yourself if you should wait to take Social Security after your “normal” retirement age, which is 66 for most people.  After all, if you wait to claim at age 70, you’ll see the largest-possible Social Security benefit.   However, if you’re not working, you’ll likely need to make withdrawals your retirement funds.  Those withdrawals create what money managers call "opportunity risk." This means you could lose money that could otherwise be invested for appreciation.  Therefore, you’ll need to weigh the opportunity cost of not having funds growing tax-deferred in your retirement accounts, against the larger Social Security benefit you will eventually get.

The math isn’t always easy to calculate, but there’s a simple, indirect rule of thumb that Social Security provides. It is known as “delayed retirement credits.” Based on your birth year, Social Security will give you a bonus for waiting to claim benefits. Take a look at how that works:

Delayed Retirement Credits

Year of birth      Credit per year

1917-24                             3.0%

1925-26                             3.5%

1927-28                             4.0%

1929-30                             4.5%

1931-32                             5.0%

1933-34                             5.5%

1935-36                            6.0%

1937-38                             6.5%

1939-40                             7.0%

1941-42                             7.5%

1943 and later                 8.0%

So if you were born after 1943, for every year you wait to claim benefits after age 66 or so, you get an 8% bump in potential benefits up until age 70. That can be a sweet deal, especially if your portfolio isn’t giving you that kind of return. If it’s doing better than that (after taxes), then you might want to leave as much money as you can in your own savings.

If you elect to work, you can build up a larger nest egg, avoid withdrawals and take Social Security later for the maximum benefit.  However, not everybody can work later, nor will they be able to plan to delay retirement withdrawals or Social Security. However, if you see that your work/lifestyle situation is flexible, you should run several scenarios.

The more money you have in your nest egg, the more complicated it gets. That’s because you'll need to consider greater tax and estate planning considerations.  You should also remember that most retirement withdrawals outside of Roth-type plans are taxable, so what you keep after taxes should be a big part of your planning calculations.

Reference: Forbes (June 1, 2018) “Social Security Benefits: Getting Paid To Wait”

 

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