Fixed Income Strategies

For a larger Social Security check, tap your IRA first

Key Points
  • Many people have enough saved for retirement to claim Social Security later than they do, according to a study in the Journal of Pension Economics & Finance.
  • That's significant: Your monthly Social Security check will typically be three-quarters larger if you claim at 70 instead of at 62.
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Many people who wind up with a smaller Social Security check because they claim their benefit early could have waited longer to file, thanks to funds in their IRA.

That's the finding from a recently published study in the Journal of Pension Economics & Finance.

"It seems like there is a significant portion of the population claiming early even though they have the potential to finance a delay," said Gopi Shah Goda, a co-author of the study and the deputy director and senior fellow at the Stanford Institute for Economic Policy Research.

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Around 34 percent of beneficiaries who claim their Social Security before 66 — the current full retirement age for most people — have enough money in an IRA to finance the equivalent of at least two years of Social Security benefits, the researchers found. A quarter of them had enough to finance at least four years.

An IRA is a tax advantaged investment account in which you can contribute up to $5,500 a year (older savers can put away more). You can start withdrawing from the account at 59½, without penalities, although you will owe income taxes on the amount taken out.

The researchers studied tax data on individuals between the ages of 59 to 71 from the 1940 birth cohort. They also found that other available liquid assets, including stocks, bonds and certificates of deposit, could help people postpone their claiming decision even further.

Your monthly Social Security check will often be three-quarters larger if you claim at 70 instead of at 62, said Laurence Kotlikoff, an economics professor at Boston University and the author of "Get What's Yours: The Secrets to Maxing Out Your Social Security.

Still, some people are skittish about withdrawing from their traditional IRA because of the taxes that will be triggered, Kotlikoff said, and so they file for Social Security first. "As a consequence, they leave tens to hundreds of thousands of lifetime spending dollars on the table," he said.

There are actually tax benefits to tapping your IRA before your Social Security checks, said Ed Slott, a retirement savings expert.

If you start withdrawing from your IRA at, say, 62, your account balance is likely to be smaller by the time you're 70½ —when you'll be subject to required minimum distributions. As a result, Slott said, "your pool of taxable IRA money will be less." (You may want to wait as long as possible to dig into a Roth IRA, Slott said, since those distributions are tax-free.)

Some people might not want to drain their IRA, fearing they'll be slapped with a large medical bill at some point, Shah Goda said. You can withdraw a lump sum from your IRA, whereas your Social Security, of course, is paid in monthly installments.

Others might worry that Social Security will not be available to them down the road, she said. "Any type of reform would almost certainly protect people close to retirement age, and would not be conditional on whether people have claimed or not," she said.

To be sure, there are some instances in which claiming your Social Security early makes sense, such as if you know you're not going to live that long.

Others will file as soon as they turn 62 out of necessity, but, Slott said, "if you don't need it, why take something now when you can lock in a much bigger check for life later?"

Social Security myths
Social Security myths