Delaying Social Security: A Retirement Strategy to Consider
May 9, 2022
Retirement may seem far away still, but early saving—and early planning—can pay off. If you’re like most Americans, you’re counting on the Social Security that you’re paying into now to be a part of your ongoing income during retirement. What you might not realize is that being strategic about your Social Security benefits is just as important as making strategic investments.
Fun fact: While you can begin taking Social Security in your early 60s, the monthly payments you’ll receive become larger the longer you delay taking it. With each year that you defer payments beyond your “full retirement age” (currently 66 or 67, depending on your birth year), your payment increases by 8%, up to age 70.
Perhaps you’re hoping to retire in your early 60s, and you’re thinking, “No way can I wait until 70 to take Social Security.” Think again. In fact, that delay may be completely feasible—though it might take some planning. Here, five ways to develop alternative income streams that may help sustain you in those years that your Social Security payment is quietly multiplying.
Your nest egg.
Setting aside a nest egg is a great idea for many reasons, the main one being that for most people, relying solely on government benefits won’t be enough to maintain their standard of living in retirement. Investing early can also help you build a large enough nest egg for you to retire when you want, and delay your Social Security payments until it’s most advantageous. Some of the typical investments to consider for future income include dividend stocks, high-yield investments, and retirement income mutual funds. If you invest in a 401(k), 403(b), or IRA during your working years, you’ll be able to make withdrawals from those plans without penalty after you reach age 59 ½. Consider talking to a financial professional about how to structure such withdrawals to make sure your investments can continue to sustain you throughout your retirement.
Keep in mind that withdrawals from a traditional 401(k), 403(b), or IRA will be taxed at your ordinary income tax rate. Withdrawals for income from Roth IRA accounts will not incur income tax as long as you’re 59 ½ and you’ve had the account for at least five years. You might want to determine your tax liability on Social Security payments versus investment withdrawals to help you settle on the best strategy. Many financial and tax professionals offer software that can quickly show you the different scenarios and your resulting tax bill.
You can also consider purchasing an annuity, like a fixed annuity, some of which can guarantee a predictable income stream in retirement. An annuity is a contract between you and an insurance company: In return for your lump sum payment or series of payments, the insurance company agrees to pay you regular disbursements of income. During the payout period, which can be over a determined number of years or until the end of your life, you get back the money you paid, along with any interest credited. The amount of income you can count on depends on the amount you pay into the annuity, the amount of interest credited, and your age at the time you begin withdrawing income.
If you’d like to delay your Social Security, you could use an annuity to help supplement your income until you’re ready to draw on your benefits.
Permanent life insurance policies.
You may think of life insurance only in terms of securing a payout for your family in the event of your death. That’s the main reason to have life insurance, of course. But you might not realize that some types of life insurance can also help to provide a stream of income during your lifetime. Certain types of permanent life insurance policies include an account value (commonly referred to as “cash value”) component that can grow tax-deferred over time. As you make your payments (also known as premiums) to your permanent life policy over the years, a portion of those payments goes into your account value. Once your policy’s account value reaches a sufficient amount, you can take a cash value withdrawal or a loan against the policy. (Some permanent policies even allow you to make extra payments—using a tax refund or a bonus, say—to help build your account value more quickly.)
With planning, you can make sure you have a sufficient cash value to withdraw from or borrow against by the time you’re ready to retire. This may allow you to delay taking Social Security.
Real estate investments.
By investing in one or more real estate properties, you can potentially generate rental income. These properties could include a single-family home, multi-family property, commercial real estate, or an investment into a REIT (real estate investment trust).
If you invest in real estate while you’re still working, the rental income may be enough to pay off the mortgage on the property. Then, when you retire, you may be able to use that rental income, minus certain expenses such as property taxes and maintenance, as predictable cash flow during retirement.
Retirement on your terms.
Retiring when you want to is all about considering your options early—including the option to delay taking Social Security in order to maximize your monthly benefit. That means acting now to put in place alternative additional income streams that will sustain you until you’re 70.
There is, of course, no single “best” way to invest for the future. And that’s the good news: The wide array of financial products available means that you can pick and choose according to your own tastes, temperament, and risk tolerance. If you’re also looking for some protective benefits, adding a permanent life insurance policy to your financial plan could be an option. If you like real estate, investing in a rental property might lead to not just a solid income stream, but an enjoyable side business. The one option you shouldn’t sidestep is looking ahead and making a plan to help ensure that you get the retirement you want.
Five ways to develop alternative income streams that may help sustain you in those years that your Social Security payment is quietly multiplying
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