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Many retirees may be needlessly passing up bigger Social Security checks.
A majority of retirees — 56.6 percent — claim their Social Security benefits before tapping their individual retirement accounts (IRAs), based on a study that was recently published in the Journal of Pension Economics & Finance.
This could be a costly mistake, as waiting longer to claim Social Security benefits generally means that you will end up with a larger monthly benefit payment.
For the study, researchers looked at annual data for taxpayers born in 1940, specifically examining the retirement account withdrawals that these people made when they were ages 59 through 71.
This age range is key because generally:
- The earliest age at which you can withdraw money from an IRA without being hit with an early withdrawal penalty is age 59½.
- The earliest age at which you can start claiming Social Security benefits is 62.
- Full retirement age (FRA) — when you are eligible for your full benefit amount rather than a reduced one — ranges from 65 to 67, depending on when you were born.
- There is no financial advantage to waiting past age 70 to claim benefits, as we explain in the next section.
The financial advantage of delaying Social Security
Folks who start receiving benefits before FRA will see their full benefit amount reduced by as much as 30 percent, depending on their age.
Folks who wait past their full retirement age will see their benefit amount increase by as much as 8 percent each year they wait past FRA, depending on age. This annual increase ends at age 70, though, which is why there’s no financial advantage to waiting longer than that.
So, tapping a retirement account before claiming Social Security benefits could be one way for many retirees to increase their benefit amount.
The thought of depleting retirement savings early on might seem scary. But the flip side is that if living off your savings for a few years enables you to delay claiming Social Security, you ensure that you will receive a bigger benefit payment every month throughout your retirement.
There’s no money like Social Security retirement benefits
The amount of your monthly Social Security retirement benefit payment is based on a formula that’s meant to be actuarially neutral. That basically means you should receive the same total amount of benefits in your lifetime regardless of the age at which you start receiving them.
Still, waiting as long as you can to claim is common advice.
After all, you can’t know exactly how long you will live, but you do know that your Social Security payments will continue for as long as you live — assuming the system doesn’t fall apart before then.
In fact, that’s one of the characteristics of Social Security payments that set them apart from other types of retirement income, as we detail in “5 Unique Features of Social Security Income — and Why You Should Delay It.”
Of course, delaying Social Security isn’t right for everyone. If you’re unsure about the best age for you to start receiving benefits, consider getting a customized analysis of your options from a specialized company like Social Security Choices. You can learn more about it — including how to get a discount on your report — in “Maximize Your Social Security.”
What’s your take on tapping retirement accounts and claiming Social Security? Sound off below or over on our Facebook page.