Ensuring that you are financially secure throughout your retirement is critical. It can be very difficult to cope with having limited funds later in life when healthcare costs often rise and returning to work becomes much more difficult.
The decisions you make about Social Security can play a major role in your financial security since your choice of what age to claim benefits plays a big part in determining how much money you receive each month. While benefits become available once you turn 62, each month you delay your claim increases the size of your benefit. As a result, many people make the decision to delay Social Security to eventually enjoy a bigger monthly check.
Waiting as long as possible -- benefits max out at age 70 -- is indeed the best option for most retirees because it nets them the highest amount of lifetime benefits. But there are situations when putting off a claim could be a huge mistake that derails your retirement plans.
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A delayed Social Security claim could be a disaster under these circumstances
Social Security was originally designed so retirees would get approximately the same amount of lifetime benefits, regardless of their claiming age. But life expectancies have climbed since the rules were put in place. Anyone who delays their claim and outlives their life expectancy gets a higher monthly check than early filers, and that adds up over the years into a higher lifetime benefit as well.
But waiting until 70 to get the maximum monthly benefit, or even just a couple years, could be the wrong choice if doing so causes you to spend your personal retirement savings too fast.
Even if you manage to maximize your Social Security benefit waiting until age 70, you likely won't be able to live off your benefits alone. In Dec. 2022, the average retirement check at age 70 was $1,963.48, or $23,561.76 for the year -- not enough for most people to be comfortable.
People need supplementary savings since Social Security benefits are not designed to be a retiree's sole income source. Replacing about 70% to 80% of pre-retirement earnings is a popular benchmark for people to maintain their standard of living in retirement, while Social Security is only designed to replace about 40%. Withdrawals from your retirement accounts should cover the rest.
The problem arises when you withdraw too much from your savings accounts too early in your retirement. If you don't maintain a safe withdrawal rate -- which is typically around 4% or less of your savings -- you could drain your accounts too quickly. That reduces the returns you earn on your savings while in retirement and opens you up to the risk of running out of money. And if you've stopped working but don't have Social Security benefits coming in, there's an increased chance of this happening.
Most people can't wait until 70 to start getting payments. So if you retire earlier and need to draw excessively from your investment accounts to cover living expenses without Social Security, you could find yourself with too little in savings left by the time you finally claim your benefits. And since you can't live on Social Security alone, that becomes a big problem.
Don't drain your savings account just to delay Social Security
If you have enough money in your investment accounts to support yourself without Social Security, waiting until 70 -- or as long as you can -- is often the right choice.
But you never want to spend down your retirement accounts while waiting based on the hope the higher benefit will be enough to fund your retirement. If there's even a possibility this will happen if you delay Social Security too long, an earlier claim is your best bet.
