You may think of retirement simply as the time of life when your career ends, but it’s really so much more than that. Essentially, it’s the stage at which you have finally reached financial independence and can afford to leave your career and live comfortably without relying on an employer’s pay. Thinking of it this way can really help you shift your focus to one that helps you create financial independence.

Financial independence isn’t necessarily about having millions of dollars in the bank. You can reach financial independence through a combination of regular saving, investment growth, insurance protection, careful spending, and an aversion to debt. There is one other tool that can significantly impact whether you are financially independent, and that is Social Security.

Social Security: Timing Is Everything

Retirees can begin taking Social Security payments as early as age 62. While that may seem extremely appealing, especially when you’re looking forward to leaving work, remember that it comes at a significant cost. Taking Social Security before you reach full retirement age (which varies depending on your date of birth) means accepting a lower monthly payout for life, thus leaving a substantial amount of money on the table.

When your goal is to be financially independent throughout your retirement years, it’s generally a good idea to at least wait until full retirement age before taking your social security payments—that is, unless the growth of your other investments is high enough to offset the decrease in payment. In that case, it may be better to take early Social Security and allow your investments to continue to gain value. However, for most retirees, waiting is the best choice. It’s even better if you can wait a year or more past full retirement age because your benefit maximum will grow by roughly 8 percent each year you wait, up to age 70.

Reasons Your Social Security Payment Is so Important

Waiting as long as possible to take your Social Security payments is a vital step toward dealing with future financial uncertainty and economic volatility. For example, by the time you reach retirement age, a significant portion of your assets will be invested in fixed products. If interest rates stay low or dip down from future highs, it will become difficult for you to avoid taking from your investment principal when you need income. Another future point of uncertainty is the tax environment. Retirement income is often taxable, and if tax rates move in the wrong direction, you could see a large portion of the income you pull from your retirement accounts going toward taxes. Then there are future medical costs, inflation, housing costs and so on. A larger Social Security income will also allow you to leave your retirement funds invested longer, giving you a better opportunity for upside potential and allowing you the ability to avoid liquidating positions during a downturn and locking in losses.

Many people think of Social Security income as a simple supplement to the retirement savings they’ve amassed over the years. But for many seniors, Social Security offers an important way to strengthen their financial situation and keep them independent in the decades to come. Be sure to contact your financial advisor to help you maximize your Social Security benefits as part of your overall retirement plan.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or products may be appropriate for you, consult with your financial advisor.

The Retirement Pros
July 2015