When it comes to retirement planning, few choices carry as much weight as when to claim Social Security. It may seem like a simple decision at first -- start benefits as soon as you're eligible or wait a bit longer.
But the timing of your Social Security claim could have a lasting impact on your finances in more ways than one. So it's important to get that decision right.
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Why your filing age matters
Your lifetime wages help determine how much money Social Security pays you each month. But your filing age plays a big role as well.
If you claim benefits at full retirement age, which is 67 for anyone born in 1960 or later, those monthly checks won't be reduced. You'll get the monthly benefit your earnings history entitles you to.
If you file early, which you can do as soon as you turn 62, you'll get less Social Security each month. You can also delay your claim until age 70 for larger checks.
Obviously, larger Social Security benefits mean more spending power on a monthly basis. But that's not all they mean.
Larger benefits could be the ticket to preserving your savings
Ideally, you won't just be retiring on Social Security, but rather, those benefits plus some money socked away in an IRA or 401(k). But whereas your retirement savings could conceivably run out on you at some point, Social Security is guaranteed to pay you benefits for life. So the larger your monthly checks are, the more long-term protection you get.
Larger Social Security benefits could also be instrumental in preserving your savings and avoiding running out of money. And that's a real concern whether you retire with $500,000 or $5 million.
If you need both your savings and Social Security to cover your expenses but encounter a market downturn in retirement, it could put a lot of strain on your portfolio. That could increase your risk of depleting your savings at some point in time.
What larger Social Security benefits do in this situation is put less pressure on your savings. You don't have to withdraw as much in general, and during downturns, when you're getting a more substantial Social Security payday. That could prevent you from locking in massive losses during market declines.
Let's imagine you're eligible for $2,500 a month in Social Security at age 67, only you delay your claim until 70. Now you're getting $3,100 a month instead. That means that instead of collecting $30,000 a year, you're getting $37,200.
Now, let's assume you need an annual income of $90,000 to cover your expenses. If $30,000 of that comes from Social Security, $60,000 needs to come out of your IRA or 401(k). During a market downturn, that could be a huge problem.
But if you need to withdraw only $52,800 from your savings during a down market, that leaves an extra $7,200 in your portfolio to potentially recover and grow. Over time, that could make a huge difference.
Choose your filing age carefully
There are a lot of factors to consider when deciding when to claim Social Security. The list includes:
- The amount of savings you have.
- Your health and family history.
- Whether you have a spouse and survivor benefits to plan for.
But when you make your decision, don't just think of it in terms of monthly spending power.
On the surface, an earlier filing means less money each month and a later filing means more. In reality, the timing of your Social Security claim could spell the difference between keeping your savings intact during market declines or not. So it's important to look at the big picture when making your choice.
