If you’re looking for advice on the best age to claim Social Security retirement benefits, you’re bound to come across conflicting opinions. Some might say you should start benefits as soon as possible, some say you should wait until age 70, and others might strike some middle ground.
The truth is, there’s no one-size-fits-all prescription for the best age to claim Social Security.
Many academic studies examining optimal claiming ages can rely on overly simplistic models and focus too heavily on a single factor (maximum lifetime benefits). That makes their findings interesting but impractical for most households. Social Security is but a single factor in many households’ complex retirement finances. Subtle differences among retirees could have a big impact on when you should claim benefits.
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When you retire versus when you start benefits
There’s no rule that says you have to start Social Security as soon as you stop working. Some people wait years between the end of their career and the start of Social Security. On the flip side, many people keep working while collecting Social Security.
That’s an important consideration in determining when to start Social Security. If you’re working while collecting benefits, there are some significant financial considerations. If you’re younger than full retirement age, which is 66 or 67 depending on your birth year, you’ll be subject to the Social Security earnings test. That could lower the amount you receive in benefits each year. Additionally, your income from work may make a portion of your Social Security benefits taxable, reducing the amount you take home.
If you’re waiting to start benefits until well after quitting work, you will need to have other sources of income, such as a pension or your own retirement savings. The amount you have saved for retirement and the accounts those savings are in are additional factors that could influence your optimal claiming age.
Can you afford to wait (or afford not to wait)?
If you plan to wait to claim Social Security after retiring from work, you’ll be drawing more from your retirement savings until you start receiving monthly payments. This can be a smart financial move since your Social Security benefits are guaranteed to keep increasing in value each month you wait to claim them, whereas your retirement portfolio is not guaranteed to increase.
However, it also likely means larger upfront withdrawals than you will withdraw from your accounts once you start Social Security. You need a portfolio that can handle those big withdrawals while still ensuring you have enough later in retirement. Social Security alone is unlikely to cut it for most households.
On the other side of the equation, a portfolio that’s too large and primarily located in pretax retirement accounts like a 401(k) or IRA can pose a problem down the line once you start required minimum distributions (RMDs). Since RMDs count as taxable income, they can create a big tax liability that’s only made worse when you start Social Security. A large RMD makes it impossible to avoid taxes on other income, such as Social Security and long-term capital gains. Additionally, a large RMD could put you over the income threshold for a Medicare IRMAA, which increases the cost of your health insurance — basically another form of tax.
You may want to take as many years as possible to convert some of those funds in pretax accounts to Roth accounts, which aren’t subject to RMDs. Doing so may come with a larger upfront tax bill, but the tax savings later could be substantial.
On the other hand, if the vast majority of your savings are in Roth accounts already, you have a lot more flexibility to determine the best Social Security claiming age for yourself.
It gets more complicated with a spouse
If you have a spouse, you will have to plan your retirement finances as a household. Spousal benefits should be a big consideration in your claiming age, including survivor benefits for the spouse who lives longer. One spouse might continue working while the other retires, adding more complexity to the claiming decisions.
The most important thing is to consider how one spouse’s claim will affect the entire household’s finances and ability to plan for the future. That means taking into account how all the factors outlined above affect not only you, but also your spouse.
The complexity can be overwhelming, and if you truly want to determine the best Social Security claiming age for you and your spouse, you might need some assistance. There are a handful of good financial planning software options, but it might be easier to set up a consultation with a fee-only financial advisor well before you retire. They can help you make a solid retirement plan. You could end up with a much more secure and optimized retirement for a relatively modest cost in the grand scheme of things.
The best age to claim Social Security is different for everyone. Understanding all of the factors and complexities of finances in retirement and how they apply to your personal situation is the key to determining the ideal strategy for you.
