Delaying Social Security
- August 5, 2021
- Phil Cannella
- 0 Comments
Claiming Social Security prior to reaching the full retirement age of 67 years old reduces the monthly payment that beneficiaries receive, yet most individuals taking Social Security activate their income payments immediately after reaching age 62. 35% of men, and nearly 40% of women begin collecting their Social Security benefits at age 62, and following the events of 2020 with the coronavirus pandemic, even more Americans are anticipated to activate their benefits early. Whether Americans lost their jobs due to shutdowns and closures, or were forced into an early retirement, collecting Social Security can serve as a way to receive guaranteed income to moderately make up for lost wages.
In years past, Social Security, pensions, and principal protecting multi-year guaranteed annuities made up the three prongs of safe retirement income; however, pensions have become a rarity as businesses have adopted 401(k)s signaling a switch from defined benefit plans to defined contribution plans. As a result, more individuals reaching retirement age have become dependent on Social Security with 1 in 4 recipients relying on their benefits to account for 90% of their income — the average yearly payout of Social Security benefits is $18,000. This sheds some light on the reasoning why most Americans tap into their Social Security as soon as they are eligible at age 62. Despite these statistics however, Social Security replaces roughly 40% of pre-retirement income — which is further diminished by activating the benefits prior to the full retirement age — meaning retirees must find other avenues to supplement income in retirement.
Taking Social Security benefits early can effectively reduce a recipient’s benefits by 30% or more compared to activating the income stream at their full retirement age. If possible, the recipient can delay their benefit further to age 70 which can boost their Social Security payments by roughly 24%. By taking Social Security early other complications arise, like taxes for example. If the recipient continues to work while collecting their Social Security, they will likely be subjected to more taxes or have parts of their Social Security withheld. To avoid any kind of tax issues, retirement experts have recommended delaying Social Security payments and to cover the lost wages by investing in vehicles that provide a guaranteed stream of income that satisfies the recipients financial needs. In doing so, the recipient can delay their Social Security and enable their benefit payments to grow.
This can be an important retirement strategy for seniors since one of their largest concerns is running out of money. Therefore, utilizing other safe and guaranteed investments such as principal protecting annuities can ensure that an individual does not run out of funds, has a steady stream of income when they first meet retirement age, and ensures that their benefit from Social Security is maximized. If a retiree had the ability to delay their Social Security until age 70, that would likely result in a benefit increase of more than 75% as compared to collecting at age 62. This kind of strategy may become even more beneficial in the future as complications with the Social Security trust funds expand.
The trust funds that finance the Social Security program have been running out of money for years, causing economists, politicians, and recipients of Social Security to worry about the future ramifications of the system going bankrupt. One of the foreseeable consequences of the trust funds losing money would be a reduction in the total payments made to current and upcoming recipients of Social Security benefits. Rather than retirees receiving 100% of their expected monthly payout, many if not all could expect to see a 70 – 75% monthly payout based on economists’ projections. This change alone could have drastic implications for a large segment of the population which relies on fixed income to satisfy their financial needs; and yet this misfortune increases the invaluableness of guaranteed income obtained from principal protecting annuity vehicles.
Of course, when deciding to collect Social Security, every retiree’s financial situation must be considered before the income is activated. Delaying Social Security in some cases may not be beneficial for someone who has an underlying medical condition or simply does not anticipate living well into their 80s or beyond. In scenarios like that, collecting Social Security payments early could result in receiving more money over the remainder of their life, than if they had delayed their benefits. This is not considering the investors ability to invest in an annuity to receive a guaranteed income stream. Some experts have indicated that doing so can provide the necessary income during the early years of an investor’s retirement while allowing them to delay their Social Security to maximize their future monthly payout.
The benefits of guaranteed income from annuity investments can provide unique strategies in retirement to help seniors avoid their number one fear: running out of money. In a year that has seen record amounts of economic volatility, coupled with massive job losses, seniors impacted by the effects of the coronavirus and forced into an early retirement have available options that include delaying their Social Security income to allow their payments to increase. Seniors who retire before their full retirement age and need a steady income to avoid spending down their assets, can utilize these guaranteed income annuities to provide an income stream for several years to maximize their Social Security benefits.
Even in cases where retirees have already activated their Social Security income early, growth and income investment vehicles, like multi-year guaranteed annuities, are excellent sources of retirement peace of mind for investors looking for protection, growth, and guaranteed income. With 1 in 4 seniors relying on Social Security to make up 90% of their retirement income, the benefits of an income annuity should be strongly considered by investors who may find themselves in an early retirement situation, or in need of another source of guaranteed payments.
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