27 Apr Should I take Social Security now or should I wait?

Q. I’m planning to retire in five years. I have saved $1.7 million in IRAs and 401(k)s. I’m 62 and I’m still able to max out the accounts, including catch-up contributions. Would it make sense to take Social Security now and put it in savings or should I wait?
— On the fence

A. It is good that you are thinking about all this well ahead of your retirement date.

Choosing when to take Social Security is a big decision.

Normally, you can apply for Social Security benefits as early as when you turn 62 or delay it until you are 70 years old, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.

He said the advantage of delaying your application is that your Social Security benefits increase the longer you wait to apply.

“If you apply at age 62 as opposed to your Full Retirement Age (FRA), which is 67, your benefits will be reduced by 30%,” he said. “If you wait beyond age 67 your benefits will increase by 8% a year. So the increase in benefits between age 62 and 70 years is almost 80%.”

He said for most people in good health who have other sources of retirement income to cover expenses, it makes sense to delay applying for benefits.

“Remember, Social Security income is also indexed to inflation, so you are essentially getting lifetime fixed income with inflation protection,” he said. “These decisions also affect spousal and survivor benefits so you will want to think through this.”

There is something else you need to consider: If you are under the FRA and you earn above an annual limit, your Social Security benefits will be reduced by $1 for every $2 you make over the annual limit, Panambur said.

For 2023, that limit is $21,240. Given that you’re 62 years old and under the FRA, if you make more than that limit, your Social Security benefits will be reduced, he said.

Then there are your retirement accounts.

Your contributions to tax deferred accounts such as IRAs and 401(k)s are tax deductible in the year contributions are made but are included in your taxable income when you withdraw funds from those accounts, he said.

Starting in 2023, you can wait until you turn 73 to withdraw funds, he said.

“Usually it is beneficial to delay withdrawals so that you can enjoy tax deferred compounding for as long as possible, however, in some cases, especially when you have a relatively large retirement account balances and significant taxes due, it may be beneficial to do a ‘Roth Conversion’ i.e take money out of your IRA or 401(k) in the years when you expect your taxable income to be low, and move it to a Roth IRA,” he said.

Your withdrawals for the Roth conversion will be included in your taxable income but if you are able to manage your taxable income you could end up saving significant amounts in taxes, he said.

“Money in a Roth account incurs no taxes if certain conditions are met,” he said. “You will want to construct suitable portfolios in these two types of accounts depending on your situation and tax sensitivities.”

Important to note, when you turn 65, you will need to apply for Medicare and your taxable income affects how much Medicare premiums will be.

“As you can see there are many moving parts that need to be considered to ensure that you have the best possible outcome,” Panambur said. “A qualified financial advisor can help make recommendations based on your situation.”

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This story was originally published on April 27, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.