How Delaying Retirement Can Affect Social Security Payments
Deciding when to retire is an important decision, and even putting it off by one year can have a big impact on your finances.
Waiting a year can result in a larger Social Security payment, in addition to allowing your wealth to compound over a longer period of time. Learn how the decision can affect your money, and make it easier to live your ideal retirement life.
Maximum lifetime benefits
The Social Security Administration bases your payments on your lifetime earnings, or “indexed monthly earnings.” This is calculated based on an average of up to 35 years of your income. If you have not worked for 35 years, any years you have not worked will count as zero. And each year your highest earner replaces the lowest.
The Administration says “higher lifetime income can mean higher benefits in retirement.”
If you’re earning more near retirement than in the earlier years of your career – which is the case for most people – it can make sense to work an extra year to make up for a year with less pay.
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Higher fees from delays
While you are allowed to start receiving your Social Security benefits when you reach age 62, waiting can pay off.
You can get your full benefit when you reach your full retirement age, which is between 66 and 67, depending on when you were born. The Trustees website has a tool to determine your retirement age. But for each year you delay receiving Social Security benefits beyond the full retirement age until age 70, your benefit increases by 8%.
Working even one more year gives you at least one more year that you don’t have to tap into Social Security. Also, if you have a high income from working, a larger portion of your earnings may be taxed.
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Some benefits to your savings
Social Security aside, an extra year of work gives you more time to build up your 401(k) savings, pay off debt and give yourself a better financial buffer for health care and other expenses. Working an extra year also means your nest egg doesn’t have to expand as much, increasing the chances that you’ll outlive your portfolio and never run out of money.
You should also consider the early withdrawal penalty in your retirement savings accounts, such as your 401(k) and individual retirement account (IRA). If you withdraw money before age 59 ½, there is usually a 10% tax penalty on top of regular federal income taxes. You may also be subject to state taxes.
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