Even if Social Security is not a big slice of your retirement income portfolio, it’s a valuable component.
You get an annual cost-of-living adjustment, and benefits are backed by the U.S. government.
Think of Social Security as “an inflation-adjusted lifetime income annuity,” said Jay Abolofia, a certified financial planner in Weston, Mass. “It’s a guaranteed source of income that keeps up with inflation and pays you and your surviving spouse until you die.”
And in today’s economic environment, Social Security carries more weight.
With interest rates hitting bottom, yields on conservative investments such as bonds and certificates of deposit are paltry.
Plus, “recessions often cause companies to cut or eliminate the dividends they pay to shareholders. Both of those effects can reduce the amount of income retirees receive from their investment portfolios,” said Brian Littlejohn, a certified financial planner in Glenwood Springs, Colo.
The million-dollar question is: At what age should you start taking retirement benefits?
If you claim at 62 — the earliest age possible — you’ll receive up to 30% less in your checks than if you wait until your full retirement age, which is 66 to 67 for those in their mid-sixties and younger.
For each year you postpone taking benefits past full retirement age up to 70, you get an 8% boost in delayed retirement credits.
Claiming at 70 is often the best move if you can afford to wait and expect to live until at least about age 80.
Postponing benefits may also help keep you in a lower income-tax bracket during the early years of your retirement.
While you’re in a lower bracket, it may make sense to convert a traditional IRA to a Roth, for example, paying a reduced tax rate now and enjoying tax-free withdrawals later.
For married couples, it’s wise for the higher-earning spouse to claim benefits at 70, if possible. That’s because when one spouse dies, the surviving spouse receives 100% of the highest benefit.
“This will increase the guaranteed stream of income that lasts not just for the higher earner’s lifetime, but also the spouse’s lifetime. It’s a way to create longevity insurance,” said Greg Will, a certified financial planner in Frederick, Md.
It may be worthwhile for the lower-earning spouse to claim his or her own benefits as early as 62 to gain some income in the meantime.
Spouses should keep some other things in mind, too. You can claim spousal benefits on your husband or wife’s record — even if you are not entitled to benefits from your own earnings — as long your spouse has started his or her benefits.
If you wait until your full retirement age to claim spousal benefits, you get 50% of your spouse’s primary insurance amount — the benefit your spouse is entitled to at his or her full retirement age.
A lower-earning spouse may choose to start his or her own benefits as early as 62, then switch to the spousal benefit once the spouse starts claiming benefits, if claiming the spousal benefit will produce a larger check.