In a recent episode of the Functional Retirement Podcast, host Thatcher Taylor delved into the important decision that retirees face between taking Social Security benefits or utilizing their IRAs for income. This decision window typically spans from age 62 to 70, and it can have a significant impact on one's retirement finances.
Thatcher outlined two main options: taking IRAs first and delaying Social Security benefits, or taking Social Security first and delaying IRA withdrawals. He discussed the arguments for each approach and offered his own insights on how to navigate this decision.
One compelling reason to tap into IRAs first is to maximize Social Security benefits. By delaying Social Security until age 70, retirees can potentially receive a higher lifelong income that may even be tax-free. Taking Social Security benefits at age 62, the earliest possible age, results in a reduced amount (around 30%) based on the full retirement age of 67. However, waiting until age 70 allows the benefit to grow by 8% each year, resulting in a significantly larger payout.
Another advantage of delaying Social Security is the potential for spousal benefits. If the higher-earning spouse passes away early, the surviving spouse can receive a larger benefit if the higher-earning spouse delayed their benefit. By tapping into IRAs for income while delaying Social Security, retirees can ensure a more substantial benefit for their surviving spouse.
There are also tax advantages to delaying Social Security. By taking IRA withdrawals first, retirees can potentially keep their Social Security benefits tax-free. The more income one has on top of Social Security, the more likely it is that a portion of the benefits will become taxable. Delaying Social Security allows retirees to minimize taxable income and potentially avoid Medicare surcharges.
There are several scenarios in which taking Social Security benefits early and delaying IRA withdrawals may be the preferred option. One such scenario is if retirees have health issues or a shorter life expectancy. In these cases, it may make sense to start receiving Social Security benefits early to supplement income while delaying IRA withdrawals.
Dependent benefits can also be a factor in this decision. If retirees have non-spouse family members who qualify for benefits, taking Social Security early can provide additional income to the household. This can be especially valuable if there are disabled family members who rely on these benefits.
Early retirees who need income before reaching full retirement age may also opt to take Social Security benefits early. This can provide a source of income while allowing IRAs to continue growing.
For retirees who have sufficient income from Social Security alone, taking Social Security benefits early may be enough to cover their expenses. This can be an attractive option for those who have simplified their lifestyle and don't require additional income.
Finally, some retirees may prioritize leaving a legacy and prefer to keep their retirement accounts intact for as long as possible. By taking Social Security benefits early and delaying IRA withdrawals, retirees can preserve their assets and pass them on to heirs.
Thatcher emphasized the importance of evaluating each individual's unique circumstances and goals when making this decision. Factors such as life expectancy, spouse's age, income needs, and legacy desires all come into play. It's crucial to consider the potential impact on taxes, Medicare premiums, and overall retirement income.
Retirees should also be aware that this decision is not reversible. Once Social Security benefits are claimed, it's challenging to make changes. Seeking guidance from a financial planner can help retirees navigate this complex decision and create a comprehensive retirement income distribution strategy.
In conclusion, the decision between taking Social Security benefits or utilizing IRAs for income is a significant one that can greatly impact one's retirement. By carefully considering the various factors and seeking professional advice, retirees can make an informed decision that aligns with their goals and maximizes their financial well-being in retirement.