Have you made an average or above-average income throughout your career? If so, following a traditional rule of thumb about taking Social Security benefits could end up costing you a fortune in retirement.
The traditional rule of thumb for Social Security says you should delay filing for benefits as long as possible. Why? Because your benefits grow by 8% every year that you delay, up until age 70. That's a guaranteed 8% return on your money - who wouldn't want that?
But if you have made an average or above-average income throughout your career or if you've been a good saver, delaying your benefits until age 70 could end up costing you more than you realized.
It's true that delaying benefits could yield a bigger monthly benefit check, but it doesn't tell the whole story. Most people don't realize that waiting to claim benefits could:
- Trigger higher taxes on your Social Security income, pension payments and IRA and 401(k) withdrawals
- Double your Medicare premiums
- Cause you to forfeit thousands of dollars in spousal benefits every year
When all of these things are added up, your net income from Social Security could end up being far less than if you had started benefits earlier. In some cases, you would have brought in a lot more money by filing for Social Security as soon as you were eligible or closer to full retirement age.
So when is the right time to start taking Social Security benefits? We recommend the following:
Recommendation #1: Don't just focus on getting the biggest benefits checks possible. Instead, consider the big picture. Know how your decision could impact other components of your financial plan, especially taxes, Medicare premiums and spousal benefits.
Recommendation #2: Don't rely on a one-size-fits-all strategy. Taking a traditional rule of thumb approach to claiming Social Security benefits could leave you with far less net income in retirement. Instead, the only way to get the most from Social Security is to get a customized strategy for your specific situation.
If you're approaching retirement and thinking about starting Social Security, we recommend meeting with a trusted financial advisor to analyze your situation and determine the right time to start benefits. But don't wait: It's crucial to put a strategy in place to claim Social Security income before you need it.