Delaying Social Security May Still Make Sense Under the New Law
April 21, 2016At the end of this month, two strategies (often called “claim now and claim more later” and “file and suspend”) to maximize total Social Security benefits between spouses will be going away. Under current rules, you could file for a spousal benefit equal to one half of your benefit at full retirement age and then switch to your higher benefit later. Under the new rules, it will be much simpler. When you file, you’ll either get your benefit or the spousal benefit, whichever is higher. Although you will no longer be able to collect a spousal benefit in the meantime, there are still several good reasons why delaying your benefits may make sense:
1) You’ll probably collect more over your lifetime. The Social Security benefits are supposed to be calculated so you get the same amount if you live until the average life expectancy. (A 65 yr old woman can expect to live to age 87 and a 65 yr old man can expect to live to age 84.)You’d be better off collecting earlier if you live to less than life expectancy and later if you live longer. However, those calculations were based on older life expectancy numbers that were lower and people are continuing to live longer and longer.
2) It’s probably a better investment. Your Social Security benefits grow by about 8% for each year you delay. That’s more than your investments can be guaranteed to earn and more than they’re likely to earn, especially if you’re more conservative in your retirement years. You might as well use your lower earning investments to cover your expenses and let your Social Security benefits continue to grow until age 70.
3) You may reduce the taxes on your Social Security. Since you won’t need to withdraw as much from taxable accounts to supplement the higher Social Security checks, less of those checks may be subject to taxes. Drawing down your taxable accounts while you delay will also mean smaller required minimum distributions when you turn 70 ½.
4) You can reduce the risk of outliving your money. One of the greatest risks retirees face is outliving their savings. In that case, you’ll be glad you have that higher Social Security check in your later years.
5) Your surviving spouse will be better protected. If you don’t live quite as long as you hope, you won’t miss not getting those Social Security checks but your spouse will be able to collect a bigger survivor benefit.
There are a couple of reasons I can think of not to delay. One is if you simply don’t have enough assets to cover your expenses while you wait. The second is if you think you have a below average life expectancy and no spouse to collect your survivor benefits. In that case, you might prefer to leave more of your assets to your heirs. But if neither of those apply to you, just remember that good things come to those who wait.