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Meet Carol, a 64-year-old retiree who has been carefully planning her financial future for years. Carol initially intended to delay claiming Social Security until she turned 70 to maximize her monthly benefits, but now she’s having second thoughts. Her savings aren’t growing as quickly as she’d hoped, and rising inflation is stretching her monthly budget. Carol is worried that she might not be able to make ends meet if she holds off for another six years. Should she stick to her plan or start claiming Social Security sooner to ease her financial burden?
Carol’s dilemma is one faced by many nearing retirement age. Delaying Social Security benefits can lead to a higher monthly payment, but the decision to wait comes with trade-offs. Here’s how Carol can evaluate her options and decide what’s best for her financial situation.
1. The Benefits of Waiting to Claim Social Security
Carol’s original plan to delay Social Security until age 70 was based on a sound financial principle: for every year she waits beyond her full retirement age (FRA), she will receive an 8% increase in her monthly benefits. For someone whose full retirement age is 67, waiting until 70 could mean a 24% increase in their benefit. This is a significant boost, especially considering that Social Security payments are adjusted for inflation annually.
If Carol is in good health and expects to live into her 80s or beyond, waiting could provide her with more financial security in her later years when other sources of income may be less reliable. The higher monthly benefit would also provide more protection against inflation over time.
2. The Drawbacks of Waiting
However, there are downsides to waiting. Carol would be forgoing several years of income, which could strain her current budget. Given rising costs for essentials like food, healthcare, and housing, Carol might struggle to cover her expenses if she relies solely on her savings.
Additionally, if Carol’s health is uncertain or her family has a history of shorter life expectancy, waiting to claim Social Security might not be the best choice. In such cases, claiming earlier could provide more financial stability during her active retirement years.
3. Explore Partial Retirement Options
If Carol is concerned about making ends meet while delaying Social Security, she could consider working part-time or taking on freelance work for a few more years. This would allow her to supplement her income without tapping into her Social Security benefits just yet. Even working just a few hours a week could bridge the gap, giving her more financial breathing room until she’s ready to claim.
4. Calculate the Break-Even Point
Carol should also calculate the “break-even” point for claiming Social Security. This is the age at which the total benefits from waiting until 70 would exceed the total benefits from claiming earlier, say at 64 or 66. For many people, the break-even point occurs in their late 70s or early 80s. If Carol expects to live well beyond this point, delaying could be worth it. However, if she’s not sure, she might opt to claim earlier for peace of mind.
5. Claiming at Full Retirement Age (FRA) vs. Early
If waiting until 70 is too difficult financially, Carol could still wait until her full retirement age (FRA) , which for her is likely 66 or 67, depending on her birth year. Claiming at FRA means she’ll receive 100% of her benefit. On the other hand, claiming early (as early as 62) would permanently reduce her benefit by as much as 30%, depending on how many years early she claims.
If Carol needs the income now but doesn’t want to face the maximum reduction, she might consider claiming at her FRA, which offers a good middle ground.
6. Using Other Assets to Bridge the Gap
If Carol has other assets, such as retirement savings in a 401(k) or IRA, she could draw from those accounts to cover her expenses while delaying Social Security. By using her savings to bridge the gap, she can still maximize her Social Security benefit at age 70. However, this strategy requires careful planning to ensure that she doesn’t deplete her savings too early.
7. Seek Professional Financial or Tax Advice
Given the complexity of this decision, Carol would benefit from consulting with a financial advisor or tax expert . These professionals can help her create a comprehensive retirement income strategy that balances her Social Security benefits with her other income sources.
When searching for a financial advisor or tax expert, Carol should follow these guidelines:
- Work with a Fiduciary: A fiduciary advisor is legally obligated to act in Carol’s best interest, unlike some brokers or salespeople who might push products that benefit them more than her. Fiduciaries provide unbiased advice tailored to the client’s goals.
- Check Qualifications: Look for advisors with credentials like Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC) . These designations indicate that the advisor has the knowledge and ethics to provide sound financial advice.
- Understand Their Fee Structure: Avoid advisors who work on commission, as they may have conflicts of interest. Instead, opt for fee-only advisors, who charge a flat rate or a percentage of assets under management, ensuring their compensation aligns with Carol’s success.
Conclusion
Carol’s decision on when to claim Social Security is a critical one. While waiting until 70 would provide her with the highest possible benefit, it’s essential to balance that with her current financial needs. By exploring partial retirement, calculating her break-even point, and consulting with a fiduciary financial advisor or tax expert, Carol can make an informed decision that ensures her financial stability both now and in the future. Whether she claims early or waits, the key is to develop a personalized strategy that supports her long-term well-being.
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