When you retire, you’re going to be faced with critical decisions regarding your Social Security benefits. When it comes to determining your Social Security strategy, you can choose between one of two options: to begin taking your benefits as soon as they become available to you at age 62, or you can do a Social Security deferral—a strategic move that allows you to delay claiming your benefits until the age of 70. Navigating this decision involves a delicate balance between addressing your immediate income needs and long-term tax savings.

If you’re unsure just how to go about claiming your Social Security benefits, below we will explore key strategies for optimizing Social Security deferral while keeping an eye on both short-term financial requirements and long-term financial health.

Understanding Social Security Deferral

Although Social Security benefits become available as early as age 62, many individuals are unaware that by postponing their Social Security benefits beyond their Full Retirement Age (FRA), they have the opportunity to achieve an annual return of 8% on their eligible benefits. The benefit amount grows by 8% for each year it is deferred, accumulating until the age of 70. This growth is attributed to the acquisition of Delayed Retirement Credits (DRCs) earned during each year of Social Security benefit deferral. While this may seem straightforward, the decision to defer requires careful consideration of your individual circumstances, financial goals, and tax implications.

Key Strategies for Balancing Immediate Income Needs

Evaluate Your Current Financial Situation:

According to the Social Security Administration, approximately 50% of individuals aged 65 or older reside in households where at least 50% of their family income derives from Social Security benefits. Roughly 25% of households within this group depend on Social Security benefits to constitute at least 90% of their income. That’s a lot of dependency on Social Security.

So, before deciding on Social Security deferral, it’s crucial to first get a comprehensive assessment of your current financial situation. You’ll need to take a close look at any and all existing sources of income, such as pensions, investments, and part-time employment. Simultaneously, consider your ongoing expenses and any outstanding debts. This thorough evaluation will help you determine if you can comfortably manage your immediate financial needs in retirement without relying on the additional Social Security income.

Explore Alternative Income Sources:

If you’re interested in deferring Social Security but feel as if it might strain your current finances, then it might be a good idea to explore alternative income sources. This could include finding part-time employment, drawing from non-retirement savings, or implementing a well-structured investment strategy. By diversifying your income streams, you can help bridge the financial gap during the deferral period.

Create a Budgetary Plan:

To help ensure that you’ll be financially stable during the deferral period, develop a comprehensive budget that outlines your income, expenses, and savings goals. A carefully crafted budget can help you identify any areas for potential cost-cutting or reallocation of resources, helping to ensure a smooth transition during the deferral period. Be sure to look for areas where you can optimize spending without compromising your lifestyle.

Key Strategies for Long-Term Tax Savings

Maximize Tax-Efficient Withdrawals:

If you have other retirement savings, strategically plan your withdrawals to minimize the tax impact. A smart way to do this is to withdraw funds from any tax-advantaged accounts first and utilize your taxable accounts later. By doing so, you can optimize your overall tax liability during the deferral period, potentially reducing the amount of Social Security benefits subject to income tax.

Coordinate Spousal Benefits:

If you’re married, it’s incredibly important to sit down and coordinate Social Security benefit strategies with your spouse. This may involve one spouse claiming benefits earlier while the other defers, optimizing the overall household income and potential survivor benefits. As you plan, keep in mind the potential impact of spousal benefits on your combined financial picture.

Consider Roth Conversions:

Another way you could potentially optimize your long-term tax savings is to convert your traditional retirement account assets into Roth IRAs. While this incurs taxes in the short term, it can lead to tax-free income in retirement, providing flexibility and potential tax savings during the deferral period. Roth conversions can offer a unique opportunity to control your taxable income, especially when Social Security benefits become a significant part of your retirement income.

Is Social Security Deferral the Right Move for You?

For those considering Social Security deferral, understanding the nuances of balancing immediate income needs with long-term tax savings is crucial. Social Security deferral strategies can vary based on individual circumstances, so finding the right approach requires careful thought and deliberate planning. By implementing these key strategies, you can navigate the complexities of Social Security deferral, optimizing both your short-term financial stability and long-term tax savings.

Ultimately, the decision to defer Social Security is a personal one, but seeking advice from financial professionals you trust will help you make informed decisions that align with your unique financial goals. At Safe Tree Retirement Services, our expert advisors are here to guide you through the complexities of Social Security deferral and help you craft a personalized retirement strategy. Schedule a consultation today and embark on your journey towards greater financial well-being.