(Sam Swenson, CFA, CPA)
Though many people are fearful about the future of Social Security, the reality is that current and soon-to-be retirees will be able to rely on the program for the foreseeable future. Given the current inflationary environment we face – alongside several other headwinds, like rising interest rates – getting the most out of Social Security should be seen as an imperative for those currently in and approaching retirement.
Social Security has its benefits
In most years, the government gives every Social Security recipient’s payments a bump via a cost of living adjustment (COLA) based on the prior year’s inflation. For 2022, the COLA was 5.9%, and the expectation is that 2023’s will be a fair amount higher.
COLAs are separate from your increased base benefit if you delay filing beyond what the government designates as your full retirement age (FRA). People who file at their full retirement age (now 67 for those born after 1960) will collect 100% of the benefit they are due based on the amount they’ve paid in Social Security taxes over the course of their career. For every month you delay filing for benefits beyond that age (up to age 70), you’ll receive incrementally larger base benefits that amount to 8% a year. For every month earlier than your full retirement age that you file, your base benefit gets reduced by a fraction of a percent. Those fractions add up. If you file immediately after you turn 62 (with an FRA of 67), your actual monthly benefit will be 30% less than your “full” benefit.
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As such, if you can manage it, waiting until you turn 70 to claim Social Security is one of the more effective ways to raise your guaranteed-income floor for the rest of your life. Having a higher minimum guaranteed income (and one that gets adjusted for inflation) is a valuable benefit that can help you maintain your standard of living and reduce the rate at which you deplete your nest egg.
Your Social Security benefits will keep coming for the rest of your life, so the decision about when to file for them is one of the more consequential choices you’ll make as you enter retirement.
Certainty in retirement is essential
Unless you’ve been able to build your nest egg well into the seven figures, your comfort level when it comes to drawing down on your investments may not be particularly high. And your worries are likely to be compounded if you won’t be receiving distributions from any sort of pension or defined-benefit plan from your employers.
This is why doing what you can to maximize your Social Security benefit is so central to a successful retirement plan: Knowing that you’ll receive a certain amount of income every month provides a remarkable degree of psychological comfort. Claiming too early – at 62, for example – might leave you with a significant budget shortfall down the road if you live a long life. On the other hand, waiting too long to claim your benefits might leave you with only a few years to fully enjoy your retirement if your health deteriorates.
Social Security will provide a degree of certainty about your retirement finances that few other income sources can match. Deferring benefits to the extent you can is usually a good call, although every person’s situation is different and your decision should be weighed based on your unique financial and non-financial considerations.
The US appears to be entering a period of lower-than-average stock market returns, high inflation, rising interest rates, and socio-political unrest. While optimism is simply necessary to live productively, any added certainty around one’s retirement plan is likely to prove even more precious than usual under those conditions.
Getting Social Security right
Before you file your claim for benefits, thoroughly investigate your total financial picture and consider it in the context of the myriad non-financial aspects of your life. If you’re unsure about when or how to file, it’s a good idea to schedule some time with a qualified fiduciary advisor such as a Certified Financial Planner or a Certified Public Accountant. They can help you assess your entire financial picture and decide on a plan that’s in your best interest.
The $ 18,984 Social Security bonus most retirees completely overlook
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