Jacob Duke: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host, as always. Today on the show, I want to give you five reasons why you should not claim your benefits early. And hopefully by the end of the episode, you'll see how it actually relates to way more than just your benefits being received.
So that's what going cover today. We're going to talk to these five reasons. But first, if you're new here, welcome to the show. Again, my name is Jacob Duke. I'm a certified financial planner and the owner of River Tree Wealth, a retirement planning firm that's built to help people just like you plan smarter and retire better.
So let's go ahead and just jump into this. The first reason it might be really obvious, but in general, if you take your benefits early, you are going to receive reduction in your benefits. And you're probably thinking, Jacob, I've already thought about that and I'd rather still start getting my benefits sooner rather than later. But by taking your benefits before your full retirement age, you're giving away more of the money that you've actually paid into the system. And as we both know, you're already getting a terrible return on investment by giving your money to Social Security in the first place.
So taking your benefits early only makes that worse. In fact, every year that you delay past 62, your benefit amount increases by about 6%. But really all you're doing is you're giving up 6% of your own money by delaying, because if you take your benefit at 62, you're going to get hit with about a 30% reduction in your benefits that you otherwise would receive at your full retirement age. So the 6% increase in quotes is really just you not giving up what you're already do anyway. And the real increase actually happens whenever you delay past your full retirement age all the way until 70.
Over those years from 67, if that's your full retirement age until 70, your benefits are actually increasing by about 8%. So that's number one. If you take your benefits early, obviously they would be reduced. But whenever we get to number five, you're going see how that impacts your entire plan more than you otherwise think. Now, the second thing is this.
If you take your benefits early, you potentially could be giving up spousal benefits. And here's how spousal benefits work. If you're at your full retirement age or later when you claim your own benefits, you're entitled to 50% of your spouse's benefit if that 50% amount would be more than whatever you are receiving on your own. So for example, if your benefit is $1,300 at 67 and your spouse's benefit, their primary insurance amount at 67 is $4,000 you would be eligible for a $700 spousal benefit because 50% of 400 is 2,000. And if you're already receiving 1,300 from your own benefits, the difference there is $700 and that is your spousal benefit.
It would get added to your monthly benefit amounts. But the mistake that I see all the time is when someone assumes that they're gonna get that 50% no matter what. Now, this is only true if you wait to take your own benefits at your full retirement age. If you take your benefits before then, you would qualify for less than 50%. In fact, if you take your benefits right away at 62, you would only be entitled to 32 and a half percent of your spouse's benefits, not 50%.
So without proper planning, you could be forfeiting your spousal benefit opportunities by taking your social security early. See, there's a few things around spousal benefits that have to be true. Number one is the spouse that you're claiming on, they have to be receiving their benefits too. So both people have to claim in order for spousal benefits to even be a possibility. Now, what's important to know here is really this comes down to just when you claim your own benefits and how that relates to that 50% versus 32 and a half or anywhere in between what you could get, because let's say that you are 67 at full retirement age and your spouse, they took their benefits at 62.
Well, because they took their benefits at 62, that does not impact your spousal benefits at all. All that you're really worried about in order to get that 50% amount is when you claim, not when your spouse claims. So your spouse claiming early will not reduce your spousal benefits at all, because really this is based on what's called your PIA primary insurance amount. It's not based on what your spouse is actually getting. So lots of nuances there, but in general, if you're not aware of how spousal benefits work, you could be claiming early, which results in you missing out on hundreds or thousands of dollars annually that you otherwise could have benefited from had you just waited a little bit longer and fit that into your plan.
Now, just said that, you know, if your spouse takes their benefits early, technically doesn't impact you from a spousal benefit standpoint. Well, number three here is it would impact you if they do that. Because when it comes to survivor benefits, if you decide to take your benefits early, you are reducing how much your spouse could get in the future upon your death as a survivor benefit. So this is important, especially if you are the higher earner of the two within your household. So if you're the higher earner, it might make more sense for you to delay your benefits longer, get as much as possible.
That way your spouse upon your death, especially if you perhaps would die first, they would get that much larger of an increase because they would actually take over your benefits that you were receiving at the time compared to theirs, which might be much lower. So this is actually a very important point because whenever people look at the the break even points or, you know, how should I claim social security and do I wait longer? And what if I die too soon? All these questions going on in your mind. If you are married, you've got to consider your entire cumulative household benefit amount that could be received.
And whenever you think about it that way, a survivor benefit could add a lot to that later on once one of you is gone. So whenever you're making these decisions around how to claim Social Security and when to do that, you've got to consider not just what you would receive in the break even point of, hey, I lived at 82 versus 85 versus 76, when should I claim my benefits? That's important to consider, but it's not the full picture. Whenever you're married, you've got to think about, hey, what could my spouse get if I die too early? What could my spouse get?
Maybe I should focus on increasing that amount for them as well. That way they get more benefits over their lifetime. And obviously, you know, if you die, then you wouldn't know if you're right or wrong and how you claim. That's the hard part about Social Security. But if you think about this as an entire household decision rather than just a me and what am I gonna get over my individual lifetime decision, you'll think about it differently.
So survivor benefits should be crucial in your decision making process, because if you take them too early without thinking about it beyond just yourself, you might cost your spouse big time later on. The fourth reason you should not claim your benefits early is because it would allow for more tax planning opportunities, specifically around things like tax gain harvesting and Roth conversions. So whenever we think about these two opportunities, both gains harvesting and Roth conversions, they are best done and most optimal when you have minimal other income. And what does Social Security do? Well, it adds income to your situation.
And that's kind of the point of it. So if you are trying to do these tax strategies and you throw on top of that, hey, I just turned my Social Security on maybe unnecessarily so that I can start getting something out of the deal. What you're doing is, is you're actually reducing the impact and reducing the benefit of those conversions or of the opportunities to do the tax gain harvesting. And so what you're doing is you're getting income, yes, but you're just shooting yourself in the foot, right? Because maybe your benefits there, they would actually take up the standard deduction, which means you didn't get to convert any of those dollars through that standard deduction.
And maybe it goes into that 10% bracket, which means there's less money of your conversion being done at 10. So you're increasing the effective tax rate on the converted dollars because Social Security is there. And what's interesting about this is if you're trying to do the wrong conversions and you've got Social Security coming in maybe too early, what you're doing is you're gonna increase the taxation on your Social Security benefits as well. Because maybe you've heard me talk about this, but at most 85% of your Social Security benefits are taxable, not all 100% of them are, but at minimum, none of your benefits could be taxable if you have minimal other income. So how does this really play out for a retiree?
Well, if you can maybe do your Roth conversions before you turn your social security on, and then you have less money to take out of your IRAs and you got more Roth money, hopefully at that point, what you can do is you can actually kinda work it on both sides and say, I'm gonna convert as much as I can in the standard deduction, the 10%, 12%, maybe 22%, kind of whatever your situation might dictate. I'm gonna delay Social Security. I'm gonna push that to 67 or beyond. I'm gonna do my conversions before that time. Great, I can convert at the low tax rates.
Now, when I turn my social security on, that's gonna be my primary source of income. My benefits are now increased as well. So I've got this higher cash flow coming in. And now whenever I get to RMD age in the future, those RMDs are gonna be a lot lower, which could end up causing my benefits themselves from Social Security to be taxed at a lower amount, or at least a lower amount of my benefits would be taxable because my RMDs are not gonna push that all the way up to the 85% amount. So this is again, this is real planning that you should be doing, not just saying, hey, I'm gonna take my benefits so I can get them while I can.
It's like, well, if you've got other opportunities, you could be taking a tunnel vision approach and saying, I'm just gonna get what I can, but that might end up costing you thousands or hundreds of thousands of dollars in additional taxes later on, because you didn't have the opportunity to convert dollars upfront in retirement. So you've got to zoom out and see the total net amount of benefit by taking your benefits early or delaying them and how that ties into your tax situation. Again, you've got to do a comprehensive plan here to understand what the true impacts are. Now, the fifth reason that maybe you should delay your Social Security benefits is because whenever you delay them, they obviously are larger and those larger fixed income amounts, they stabilize your plan that much more. So whenever you're running a Monte Carlo simulation and you're building these projections in, if you do live to 85 plus, it's always better on paper at least to have those larger benefits for a shorter amount of time compared to the smaller benefits for a longer amount of time.
Now, obviously none of us know we're gonna die. So the decision here is no way to be certain of you. You have no way to know what you should or shouldn't do. But the odds of running out of money decrease when you have a higher fixed income. I think we can all agree with that.
Because whenever you have the higher fixed income, the stress on your portfolio or the need from your portfolio goes down because of that. And whenever you think about how Social Security actually works, every year you're getting a cost living adjustment on your benefits. Well, if you've got a higher benefit amount in dollars, a 3% or a 4%, whatever the the cost of living adjustment is, technically that is a higher dollar amount increase every year because you're basing the percentage, the COLA, on a higher benefit from the beginning. So your cost of living adjustments are actually that much more powerful if you can delay your benefits and have a larger amount coming in monthly. And if you think about doomsday scenarios where we're looking at the social security system and saying, oh my goodness, it's gonna fail by 2035 or whatever the year is currently.
If you think that cuts are gonna happen and your benefits are gonna be reduced because of that to help keep everything solvent, well, wouldn't it make sense to actually have a higher benefit as much as possible before those cuts happen? Because if you take your benefits at 62 and then a 25% cut happens after that, guess what? You're taking an already reduced amount and reducing it further. You could be getting 50% of what you otherwise should be getting from your full retirement age amount if you did that way. So maybe increasing your benefits by delaying helps you offset any potential future reductions that could be there.
Now, to be fair, I don't think a reduction of benefits is gonna happen. There's gonna be different ways to sustain the Social Security system, but I doubt that a reduction in retirees benefits is really gonna be an option on the table. I think they'll do anything but that to be fair. So if that's on your mind, if you wanna follow the logic pattern though, maybe increasing your benefits by delaying them could be the right thing to do if you expect a cut in benefits in the future. So these five mistakes, I see them all the time.
Most of the time it happens because of shortsighted planning or just not thinking about the big picture. So what I want you to do is just don't make the decision, stop, pause, take a big picture view, 30,000 foot view and say, how does this fit my situation? What are the things I'm gonna be giving up if I do this now? Right, maybe it's the right solution for you to take your benefits at 62, but maybe it's not. The final little tidbit I'll give you here is, if you can find a way when things are good to live on your portfolio while it's making money and increasing in value and leave your benefits in your back pocket.
That way whenever the market does crash, and we do have another eight style event, you can just say, okay, I'm gonna pull my benefits card out of my back pocket. I'm gonna turn it in and say, I'd like my income now. What that does from a psychological standpoint, is it helps you continue to sleep at night a little bit, helps you maybe continue your spending pattern that you've been on. And it also takes all the stress off your portfolio. So you use your portfolio for as long as you could while things were good.
And when things went south, you turned on your fixed income, reduced how much you needed out of your portfolio to help, you know, curb the effects of that downturn. And it's a win on both sides. So again, all of these things they fit. So again, all these things should fit into a plan. And if you're somebody who's like Jacob, I've got all this dialed in.
Awesome, I'm glad to hear that. But if you're someone who is like, hey, Jacob, I understand what you're saying, but I don't have to fit that into my situation or build that out entirely. I might want some help with that. Great. You can go to our website, apply to work with us here at RiverTree.
We'll take that application, see if maybe we're the right fit. We'll have a phone call to determine that and then we'll move forward with the process from there if it is a right fit. If not, and you wanna take all this and do it yourself, wonderful, please go do so. I encourage it. But if nothing else, thank you so much for tuning in to this week's episode of Retirement Answers.
We'll talk to you again very soon. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.