The money you pluck away in an IRA or 401 (k) plan should not just sit there and do nothing. Rather, it should be invested in a way that produces as much growth as possible without exposing you to unnecessary risks.
But how long should you take to avoid taking retirement deductions to grow your ability to grow wealth in your account? If you are forced to retire early, you may tend to sign up for Social Security so that you can leave your IRA or 401 (k) alone. But is this a wise idea?
Are you growing benefits or increasing your savings?
You may already apply for Social Security at age 62, but you are not entitled to your full monthly benefit, based on your earnings history, until you reach full retirement age, or FRA. FRA is based on your year of birth, and if you were born in 1955, it is 66 and two months. From there, it increases by two months per year of birth until it reaches a maximum at age 67 for anyone born in 1960 or later.
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For every month you claim before FRA for social security, your benefits are reduced. You specifically lose 6.67% of your benefits per annum during the first three years you submit earlier, and 5% for each year thereafter. If your FRA is 66 years and two months old and you claim benefits at 62, it will shrink by almost 30%.
You also have the option to defer benefits beyond FRA and grow them by 8% per annum in the process. This incentive is up to the age of 70, and you cannot accrue credits for deferring submission. But if you are FRA 66 years and two months old and you sign up for Social Security at age 70, you increase the benefits by almost 32%.
Suppose you need money and have a choice between filing Social Security or withdrawing from your retirement plan. You may tend to sign up for benefits so you can leave your savings alone. That way, they can continue to grow. But one thing you need to remember is that you are insuring extra money for the delay of social security while your retirement plan is invested. There is nothing to know about how the stock market will perform over time, and although a stock-heavy portfolio can easily yield an average return of 8% or higher annually, your investments can also lose money if things go south.
On the other hand, delaying social security offers you a higher benefit. If your FRA is 66 years and two months and you decide not to submit a year earlier, you recommend – your benefit will be 5% higher because you do not reduce. If you decide to postpone your submission for a year beyond FRA, your benefit will increase by 8%. The stock market cannot make the same promises.
It is for this reason that it is not necessarily an excellent strategy to demand early or even timely to leave your retirement plan alone. Another thing to think about is that seniors are generally advised to move to safer investments as retirement approaches, and if you follow the rule, you may not necessarily have such a strong return on your IRA or 401 (k ) do not expect. In fact, with a 50/50 share / bond split, you can see an annual return of 5% or 6% over a ten year period, which is not bad. But if you compare that to the 8% per annum you get when you defer your social insurance with FRA, then it falls short.
Also remember that your monthly social security benefit is guaranteed for life. On the other hand, you may exhaust your IRA or 401 (k) at some point, especially if you are living longer than you expect. As such, it’s important to do what you can to get as much monthly benefit as possible – and that means sitting down as late as possible.