Many individuals and couples retire before they want to start collecting Social Security. They would rather wait to maximize their Social Security benefit. To do this, they need to find ways to fund their lifestyle while they wait to reach age 70 when their Social Security benefit is maxed out. There are many ways you can fund this income gap, and some are more effective than others.
Taking Social Security at different ages changes the benefit amount paid out to you. Normal retirement age depends on the year you were born but currently falls between ages 65 and 67. If you claim Social Security at your full retirement age, you are entitled to 100% of your Social Security benefits. However, you can choose to claim your benefit before your full retirement age at a reduced amount, or you can delay claiming your benefit beyond your full retirement age and receive greater than 100%.
The longest you can delay past your full retirement age is 70. For each year you delay taking your benefit, you will increase your eventual payout by 8% compounded. Delaying claiming your benefit until age 70 can significantly and permanently increase your Social Security income and financial security. By delaying from full retirement age 66 to age 70, you can increase your Social Security benefit to 136% of your normal retirement age benefit.
Waiting until age 70 to claim your Social Security benefit is no easy task, but there are some ways you can bridge the income gap created by delaying:
- Work Part-Time: Many physicians slowly phase themselves into retirement. Would your employer allow you to work reduced hours or, if you own your own practice, can you reduce your workload? Looking for a new challenge? Explore new fields of interest in a part-time role.
- Exhaust Cash: This is straightforward. If you have cash saved up beyond your emergency fund, using this cash to fund your lifestyle can be an effective strategy.
- Make Withdrawals from Pre-Tax Retirement Accounts: Social Security may be a taxable benefit to you. You may have to include it in your income and pay taxes on it. By delaying, you have less income which may result in you being in a lower tax bracket. You can then make distributions from your pre-tax retirement accounts like 401(k)s and Traditional IRAs while minimizing the tax impact. Additionally, with these pre-tax accounts, at age 72 you will be required to start taking Required Minimum Distributions (RMDs). This is when the IRS forces a percentage of your balance to get distributed. In some cases, this distribution can be substantially more income than you need and can push your income into a higher tax bracket. Lowering the balance of these retirement accounts during this income bridge period, can reduce the size of RMDs later that may otherwise put you in an inconvenient position.
- Tax Loss Harvesting: If you have an investment that has lost value, you can sell that investment to capture the loss. You can then use that captured loss to offset gains in another investment that you sell. Not only is this good tax management, but the two sales will also generate cash you can use as income.
Overall, delaying Social Security can lead to a significant increase in benefits and can provide an extra layer of financial security long-term. To bridge the income gap that this strategy creates, you will need to be smart about how you generate cash to maintain your lifestyle. Some of the techniques presented here take significant planning to execute correctly. For this reason, we recommend you consult your financial advisor or tax professional before taking action.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at firstname.lastname@example.org.
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