Delaying Social Security until age 70 is among the most effective ways to give your retirement income stream a boost.
Indeed, if you were born in 1943 or later, for every year you delay taking Social Security benefits beyond your full retirement age, which is either 66 or 67 depending on your birth year, the government offers delayed retirement credits, according to the Social Security Administration. These delayed retirement credits equal up to 8 percent per year in simple interest increases.1
Conversely, if you claim benefits before your full retirement, you will collect a reduced monthly benefit for life. Individuals who take Social Security at age 62, for example, the earliest opportunity, may see their benefits reduced by up to 30 percent, according to the Social Security Administration.
Thus, a monthly benefit of $1,000 at full retirement age of 66 would increase to $1,320 if delayed until age 70, and could be reduced to $810 if taken at age 62.
Source: Social Security Administration
That’s a compelling reason to postpone Social Security benefits, especially if you’ve under-saved, or you expect your lesser earning spouse will outlive you. (Your spouse would be eligible for your higher benefit after you die.)
A 2019 MassMutual Social Security Pulse Check survey found that many who file for Social Security retirement benefits early or even at their full retirement age later regret not holding out for a bigger benefit. About 30 percent of respondents filed at age 62 or younger, and nearly four out of 10 (38 percent) of them wished they had waited.
Some indicated that they filed when they did because they had undersaved and could not afford to wait, while others needed the monthly income to cover medical bills, a loss of employment, or other unforeseen expense. “This study reveals that many are leaving money on the table that they’re eligible for — and that they could have received for many years to come,” said Mike Fanning, head of MassMutual US. “Planning ahead for the foreseen — and the unforeseen — appears to be the ‘pay it forward’ message from today’s to tomorrow’s retirees.”
But delaying benefits may seem impossible for those who need more income now.
Not to worry. With a little creative planning, you may be able to maximize your Social Security retirement benefit without draining your nest egg. (Calculator: How much should I save for retirement?)
Take note: Social Security eligibility is based on your earnings history. To claim benefits, you must have worked in “covered employment” for a sufficient number of years and earned enough work credits by the time you reach retirement age. The number of credits you need to get retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (10 years of work), according to the Social Security Administration. 2
Work longer to delay Social Security
The easiest way to cover the bills while you postpone Social Security is the obvious — keep producing an income if you are able.
For many adults, the years immediately before they retire reflect their peak earning years. At the same time, their bills are often lower as their kids become financially independent and their mortgage gets paid off.
Thus, by working just a year or two extra, they have the potential to add more to their retirement savings. The IRS helps, too. Taxpayers older than age 50 may make an additional $6,500 pre-tax (2020), catch-up contribution to their 401(k), 403(b) and many 457 plans, and an additional $1,000 to their Roth or traditional IRA.3
That doesn’t mean you need to log 40 hours a week, however.
Depending on your income needs, you may be able to take part-time gigs, consult in your former field (often the most lucrative option), or turn your passion into a paycheck (sew curtains, charge for photo shoots, or become a fly-fishing guide) for extra cash.
Adults age 65 and older are twice as likely to be working today compared with 1985, with more than 20 percent indicating they were either working or looking for work, according to a 2019 report from United Income.4
Note: If you plan to claim Social Security while you work, just be sure to monitor how much money you make. Your benefit may be reduced by $1 for every $2 you earn above an annual limit if you are younger than full retirement age. For 2020, that limit is $1,82405
Your retirement accounts
You can also consider withdrawing some of your nest egg to create a short-term income stream.
While a 4 percent withdrawal rate is often considered a safe starting point, the amount you could actually withdraw depends on your time horizon, financial needs, market performance, and the size of your overall portfolio.
To stretch your retirement savings further, you must consider tax efficiency.
Financial professionals generally recommend first tapping your taxable savings, allowing your tax-advantaged tools to continue delivering compounded growth.
Next, spend down your tax-deferred accounts, such as your traditional IRA and 401(k).
Leave your tax-free retirement accounts, such as your Roth IRA, for last.
“You want to keep that shelter going as long as possible, your Roth assets in particular, because your heirs can inherit that asset tax free,” said James Guarino, a Certified Financial Planner® professional and Certified Public Accountant with Moody, Famiglietti & Andronico in Tewksbury, Massachusetts.
Another source of extra cash? Home equity.
If you have paid off your mortgage or a considerable portion of it, you may be eligible for a reverse mortgage, which enables homeowners who are age 62 and older to convert a portion of their home equity into cash.
No monthly mortgage payment is required while you live in the home, but interest rates accrue for as long as the loan exists.
You can receive funds as either a lump sum, monthly payments, or line of credit.
And, your heirs will never have to repay more than the value of your home, even if your balance exceeds your home’s appraised value when you die.
But buyer beware: Upfront costs on reverse mortgages can be high and interest fees accumulate monthly. (Learn more: The pros and cons of reverse mortgages)
Thus, the younger you are when you take out a reverse mortgage, the more compounded interest you will owe, the AARP reports.6
Reverse mortgages also reduce the amount of equity you can leave for your heirs and may drain the equity you will otherwise need for future home repairs or assisted-living expenses.
Before considering a reverse mortgage, the AARP suggests seniors explore lower-cost alternatives, such as home equity loans and lines of credit.
Life insurance cash value
Yet another bridging strategy, if it fits with your long-term financial plan, is to leverage your permanent or whole life insurance policy.
Policyowners can potentially take tax-free loans or partial withdrawals from their whole life policy’s cash reserves, up to the cost basis (the total amount of premiums paid into the policy).
This strategy could be particularly effective for those age 62 and younger, said David Freitag, a financial planning consultant for MassMutual, because the Bipartisan Budget Act of 2015 did away with some of the more popular claiming strategies for maximizing Social Security – including “file and suspend.”
Take note, any withdrawals from your cash value shrinks the size of your death benefit. Also, tapping into the cash value of a life insurance policy reduces its value and increases the chance the policy will lapse. And, if a policy lapses with an outstanding loan in excess of the cost basis, it’s taxable.
Premiums are also higher for whole life insurance than they are for term life policies and cash value accounts may not achieve the same growth rate as an equity investment. Of course, equity investments involve market risk.
Some people find it advisable to check with a financial professional to determine whether this strategy is right for their situation.
With pension plans of old all but extinct, retirees who are looking to create a regular income stream can also potentially turn to annuities. ( Learn more: Types of annuities and how they work)
Annuities are contracts issued by insurance companies that can provide a guaranteed income for life — or a specified period of time — in exchange for a lump-sum payment, or series of payments.
Those looking to delay Social Security might opt for a “period certain” Single Premium Immediate Annuity, or SPIA, to fill the income gap during the years between their retirement and when they begin claiming benefits. (Related: Income annuities)
For example, an individual who retires at age 64 and wishes to delay Social Security until age 70 would simply calculate the shortfall between his annual living expenses and stable sources of income to determine how much annual income he needs to cover with an immediate income annuity.
SPIAs can also be structured to generate a guaranteed lifetime payout.
MassMutual offers such products, of course, but that doesn’t mean they’re right for everyone. Talk with your financial professional to determine which strategy works best for you.
Keep in mind, too, that postponing Social Security benefits is not necessarily the right move for everyone.
If you can’t afford to delay your benefits, your health is failing, or your family history suggests you might not make it to the average life expectancy, it may be best to claim as early as possible, said Guarino.
“We generally advocate waiting, but if you need the income now, that’s going to trump any other decision to defer,” he said.
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This article was originally published in September, 2016. It has been updated.
1 Social Security Administration, “When to Start Receiving Retirement Benefits,” 2020.
2 Social Security Administration, “Retirement Benefits,” 2020.
3 Internal Revenue Service, “Retirement Topics – Catch-up Contributions,” January 9, 2020.
4 United Income, Older Americans in the Workforce,” April 22, 2019.
5 Social Security Administration, “Retirement Benefits: Receiving Benefits While Working,” 2020.
6 AARP, “What to Know About Reverse Mortgages,” October 29, 2019.