Claiming Social Security as soon as you become eligible, at age 62, is a common choice for Americans.
While understandable, this decision can have significant, and often underappreciated, long-term consequences. For many, the urge to claim Social Security early may stem from financial necessity, lack of other income sources, or simply a desire to “get what you’ve paid for.”
However, claiming early can reduce your benefit by as much as 30% compared to waiting until your full retirement age (typically around 67). If you are in the fortunate position of having other income sources, such as a pension, 401(k), brokerage accounts, or IRAs, delaying Social Security becomes a viable strategy. This moves the decision away from immediate need and toward maximizing lifetime income, building multigenerational wealth, and supporting charitable or legacy goals.
The True Cost and Value of Waiting to Claim Social Security
Delaying Social Security can feel counterintuitive, but the benefits are substantial. Each year you delay your claim beyond full retirement age (up to age 70), your benefit increases by about 8% due to delayed retirement credits. This is a reliable, risk-free increase, hard to match with other investment vehicles.
Life expectancy is an important consideration here. People often underestimate how long they’ll live, especially after reaching their 60s. According to Social Security Administration data, if you’ve made it to 62, you’ll likely live into your mid-80s, or longer if you’re married. There’s a significant chance that one spouse in a couple will live into their 90s. Delaying benefits not only provides you with a larger monthly payout for as long as you live, but also increases the survivor benefit for your spouse, offering important “longevity insurance.”
For instance, if a higher-earning spouse claims at 62 and locks in a lower benefit, their surviving spouse could end up with tens of thousands of dollars less in lifetime benefits, potentially affecting quality of life in older age. Delaying until 70, on the other hand, could mean a survivor benefit almost 77% larger than the earliest claim option.
The Overlooked Spousal and Survivor Impact
Among many couples, the higher-earning spouse’s decision about when to claim directly affects the survivor’s income later in life. Research suggests many higher earners fail to factor in the potential drop in survivor income when they claim early. Since only one Social Security benefit carries over to a surviving spouse, maximizing the larger benefit offers essential financial security. The impact is even more significant in couples with huge age differences or where one spouse has a considerably longer life expectancy.
Deciphering the Social Security Tax Puzzle
Another frequently overlooked aspect is Social Security’s tax implications. The provisional income formula means that, depending on your other income sources, up to 85% of your benefits can be taxable. Retirees with investment income, pensions, or who draw heavily from retirement accounts could inadvertently find themselves in a higher effective tax bracket, thanks to what is often called the “Social Security tax torpedo.”
Delaying Social Security can create a strategic “tax window” in early retirement, allowing you to draw from tax-deferred accounts at potentially lower tax rates before starting your Social Security benefits. This strategy can reduce lifetime tax bills and provide opportunities for Roth conversions and careful withdrawal planning.
Crafting a Decision for Your Situation
There is no one-size-fits-all answer to when to claim Social Security. The best approach is to integrate this choice into a holistic retirement plan, weighing current and future income sources, longevity estimates, desired legacy, and tax strategies. For some couples, it may make sense for the lower earner to claim early while the higher earner delays.
Ultimately, seeking advice from a trusted financial advisor and running personalized projections will provide clarity. Remember, Social Security is about more than just maximizing your monthly check, it’s about building lifetime income security for you and your loved ones.
Outline of This Episode
- [00:00] Most Americans claim Social Security at 62 due to a lack of other income, but those with additional resources or financial advice might delay claiming for long-term wealth planning.
- [04:16] Consider life expectancy in financial planning, especially for married couples.
- [08:56] Evaluate claiming benefits at different ages to optimize long-term financial outcomes, considering life expectancy and age gaps between spouses.
- [11:38] Social Security benefits, combined with other income, affect your tax bracket.
- [16:00] It’s important to integrate Social Security decisions into your broader retirement plan, considering income sources, tax liabilities, legacy goals, and timing.
- [17:18] Retirement tax decisions are complex, involve varying tax rates, and impact Social Security timing strategies.
Resources & People Mentioned
- Happy Gilmore
- JP Morgan – The New Longevity: Financial Planning for a Longer Life
- Social Security Life Expectancy Calculator
- Which Social Security Claiming Strategy Generates the Highest Legacy Value?
- Longer Life Expectancies Are Shaping Retirement Strategies, Ep #236 – Financial Symmetry, Inc.
