Finding the Right Fit

Question: Should I claim Social Security before my full retirement age? Also, is this the time to downsize my living situation?   

Answer: Claiming Social Security early translates into a smaller check if you claim at age 62 but your full retirement age is 67 when you’re able to collect 100% of your benefit. However, for a select few, claiming early may be the right choice. 

As we age, retirees usually spend less on average. We’ve discussed the phenomenon of the three phases of retirement known as the “go-go,” ‘go-slow,” and the “oh, no!” stages. 

As they age, retirees usually spend less on average. Healthcare costs tend to rise in later years, yet nonessentials like travel and discretionary spending tend to decline. Here’s the information from the Bureau of Labor Statistics from 2020 on average spending per age bracket. 

Age 55-64 | $64,937

Age 65-74 | $52,356

Age 75-plus | $40,839

Source: Bureau of Labor Statistics, 2020

If you do retire early and plan to use withdrawals from pre-tax retirement accounts, that may push you into a higher tax bracket. In this situation, taking Social Security payments at age 62 to reduce the amount withdrawn from those accounts may be beneficial. 

Claiming early also gives retirement assets room to continue compounding. Plus, your tax bill could be smaller due to the tax treatment of Social Security income. 

On the other hand, delaying Social Security can act as longevity insurance, if outliving your money is a big concern. Those who decide to defer their Social Security benefit earn delayed retirement credits, starting the month they reach full retirement age, or FRA (currently 66 and rising to 67 for people born in 1960 or later). For every month you delay filing between your FRA and age 70, Social Security increases your eventual benefit by two-thirds of 1% – a total of 8% each year you wait. The bottom line? There’s no single optimal time to claim benefits that fits everyone. 

Rightsizing

Housing costs play a major role in personal finances. Whether or not to reduce your expenses by reducing square footage is a highly personal decision about the lifestyle you want versus what you need and can afford. Some retirees choose to upsize to a home suited to multigenerational living, welcoming aging parents, adult children and even grandkids into a shared space. Others choose to relocate to a home of similar size in an area with a lower cost of living to increase their spending power. Still others plan to stay put indefinitely due to their attachment to a place they’ve made memories in, regardless of cost. In its most recent study conducted in 2018, the AARP found that nearly two-thirds of U.S. adults want to stay in their current home for as long as possible.

If you do plan to downsize, keep in mind the transaction costs that can eat into the profit from selling a home. If you are set on moving in retirement, think ahead about practical amenities that make aging in place easier, such as a step-free entryway and shower. It could be smart to choose a living space that can appeal to a variety of age groups.

It's all a balancing act. Paying off a mortgage feels like a giant weight lifted. But if you use most of your savings to pay off your mortgage now you own your home free and clear, but the next time there is an emergency, or an opportunity, you’ll have a more difficult time producing the cash. Before paying off a mortgage, take a realistic look at whether your house will suit your needs in retirement or if you’d rather relocate. There’s also the ability to deduct the interest you pay on a home loan on your taxes to consider. The question is whether the comfort of having reserves and a mortgage is more appealing than the comfort of owning a home outright, but with less money in the bank. 

Find the right financial fit

Whether you end up going with the conventional advice or going your own way, a professional’s opinion on your retirement income strategy could help you make the most of your resources – and help you find the lifestyle that feels just right for you. Stay focused and plan accordingly.