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If you plan on retiring in the near future, you can choose when you begin collecting Social Security. There are several reasons you might want to push back the date when you start collecting these benefits. You may be tempted to start taking advantage of the entitlement to secure a fixed income. This can help mitigate the impact created by suddenly losing a paycheck. However, you should note the substantial benefits that can be enjoyed by postponing this action for 8-to-10 years. Some reasons to consider waiting are:
Mitigate Risk of Longevity
The biggest risk for many people who want to retire is longevity, meaning the potential of outliving the savings they have accumulated. Obviously, it would be easier for people to plan their retirement if they knew how many years they would live. Trying to predict your lifespan cannot be done without introducing a certain amount of uncertainty into your calculations.
As time goes by, people are living longer. Advancements in science, technology and medicine are all contributing to this trend. While waiting longer to begin collecting your Social Security benefits certainly comes with its costs, it will ensure that you have a higher income in your golden years when you will need it the most.
If you delay collecting Social Security, you will be able to claim a larger check. According to U.S. News and World Report, your monthly payments will increase by between seven and eight percent for every year that you wait.
Cost of Living
In addition, cost of living adjustments will be higher if you wait longer. Each year that passes, your entitlement payments will increase by a certain percentage so that you can keep up with inflation. If you start later instead of earlier, the same COLA percentage increase will result in a larger dollar value since you began with a higher base.
Lower Rates on Conversions to a Roth
Any conversions you make from pre-tax retirement accounts, such as 401(k)s, to post-tax retirement accounts, such as Roth IRAs, could involve a lower tax rate if you wait until you begin collecting your Social Security benefits. A fraction of your Social Security payments could be subject to income tax liability, which means your adjusted gross income could go up.
To illustrate the difference in tax rates for Roth conversions, take the example of a family with two retired spouses. Both of these individuals do not have regular income. Based on 2016 tax brackets, the couple can convert as much as $70,700 of pre-tax income into a Roth IRA or other form of post-tax account, while only paying 10 percent in taxes. Once this transfer has been made, all capital gains, dividends and appreciation generated by the investments contained in the new retirement account are tax-free.
A couple in this situation needs to be aware of certain caveats, however. If you engage in a Roth conversion, you might be more vulnerable to tax audit risk. As a result, you may benefit from speaking with a qualified tax professional before executing such a transaction.
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