The Big Question: To Delay or Not to Delay?
If you’re nearing retirement, you have a critical decision to make: Should you take Social Security early at 62, should you wait until you reach full retirement age (66–67), or should you hold off even longer until age 70?
For most people, the answer should probably be to wait until at least full retirement age; however, some people may want to claim benefits earlier. They may need the income, or they may not expect to live much longer. In the case of poor health, however, you may still want to delay benefits if you are married and your spouse is healthy and expects to live a long life.
Although delaying may be the best answer for you, it still presents a problem. By delaying your benefits, you will need to spend down your other income sources sooner, such as your IRA. This can reduce the money you have available in the future and also potentially creates a smaller inheritance for your children.
We’ve found that spending money early can be a hard concept to grasp, no matter how much you’ve saved for retirement. This is one of the reasons we advocate planning for retirement in your 40s and 50s, when you have more time to take advantage of financial strategies that can give you income flexibility.
Beyond just saving for retirement, you should also take into account:
TAXES: Many people assume that their tax bracket in retirement will be lower than it was when they were working. But when you add in Social Security to account withdrawals and other income sources, you might find yourself in a higher tax bracket! Delaying Social Security can help you keep your tax bracket down between age 62 and 70. This in turn can give you the opportunity to convert IRAs to Roth IRAs in low (or even 0%) tax brackets. It might also allow you to take capital gains in the 0% tax bracket.
ASSET LOCATION: The 401(k) has become the preferred way to save for retirement, but the problem is that you must pay taxes on withdrawals. So, if all you do is save into a 401(k) or other tax-deferred vehicle, then you have little tax control on the back end. Putting money into a Roth IRA or regular brokerage account gives you income in retirement with lower tax consequences. It can also allow you to delay your Social Security benefits while keeping your tax bracket low and taking advantage of the Roth conversions and 0% capital gain moves mentioned above.
THE BENEFITS OF SPENDING: Spending more early in retirement might be a good thing if a family has a large estate subject to estate tax. People tend to focus on reducing their estate tax by giving their assets to family and charity, but nobody said you can’t just spend the money.
Obviously, there is no single right answer to the question of “To delay or not to delay?” For many people, delaying benefits as a form of longevity insurance is going to be the right answer. However, whatever you decide, it’s best to consider all your options as early as possible and to consider Social Security as just one element of your entire financial picture.