The Average Social Security Benefit Is Higher for January Applicants — Should You Wait to Apply?

January is an important month for anyone eligible for Social Security. That’s the month the annual cost-of-living adjustment applies to your benefits (or future benefits). The COLA provides a bump to monthly Social Security benefits to help them keep up with inflation.

But January may also be a good time for new applicants to start receiving Social Security benefits. Data from the Social Security Administration show that retirees who apply for benefits in January receive higher average payments than those who apply throughout the rest of the year. It’s also the month with the most Social Security applicants almost every year. That begs the question: Should you wait until January to apply for Social Security, too?

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How much more do January retirees receive in Social Security?

The data is quite clear: January sees more Social Security applications, and they receive higher average monthly payments. Here’s the last 10 years of data showing average January payments awarded to new retirement benefit applicants and how they compare to the average benefit awarded to new applicants throughout the rest of the year.

Data source: Social Security Administration. Calculations by author.

As you can see, January applicants typically receive 3% to 4% more on average than their counterparts applying throughout the rest of the year.

What’s so special about January and Social Security?

Soon-to-be retirees may be wondering if there’s some special Social Security rule that goes into effect in January that leads more people to apply that month and receive a higher benefit. The answer is a disappointing “yes and no.”

The amount you receive in Social Security benefits is determined by just three factors: your earnings history, when you were born, and when you start Social Security. As mentioned, you’ll receive a slight bump in benefits for each month you wait to claim Social Security after your 62nd birthday, but there’s no extra special bump in January.

But another part of the Social Security laws could influence many retirees to start benefits in January: taxes.

The IRS uses a metric called “combined income” to determine what percentage, if any, of your Social Security benefits count as taxable income. Combined income is equal to half your Social Security benefits for the year, plus your adjusted gross income, plus any untaxed interest income. If the total exceeds certain thresholds, up to 85% of your Social Security benefits can count as taxable income. But if you stay below the thresholds, you can avoid any taxes on your benefits.

If someone retires and quits their job one year, they might want to delay starting Social Security until the next year to keep their tax liability lower. What’s more, some retirees may take the opportunity to position their retirement accounts in a tax-efficient manner after stopping work but before complicating their finances with Social Security income.

It just so happens that retirees who earned more in their careers, saved more in their individual retirement accounts, and have more complicated tax situations are more likely to seek out ways to keep their tax liability lower once they start Social Security. Those same people are more likely to qualify for higher-than-average Social Security benefits. Combined with a slight delay in benefits, those factors result in a noticeable increase in the average payment for January applicants. At least, that’s my theory.

Should you wait to start Social Security until January?

Whether you should wait until January to start your Social Security retirement benefits will depend on your personal situation. However, delaying benefits for several months (or several years in some instances) after stopping work can provide significant opportunities to keep your overall tax liability low in retirement.

If you’re concerned about how required minimum distributions will impact your taxes later in retirement, you might take several years to strategically convert some pre-tax retirement savings to Roth accounts. Doing so allows you to exercise more control over your tax rate. And while you might owe more taxes upfront, you’ll be able to reduce how much you pay later in retirement. Importantly, you may be able to reduce how much of your Social Security income counts toward taxable income later as well, nearly doubling the tax benefits in some cases.

Similarly, you may be able to take significant capital gains in your taxable brokerage account with practically no tax liability in years where your other income is extremely low. You’ll have to contend with Social Security income impacting that strategy once you start receiving benefits.

That said, there are instances when trying to optimize for taxes doesn’t make as much sense. First and foremost, if you need the supplemental income from Social Security to make ends meet, don’t delay your benefits application.

Beyond that, it doesn’t make sense to delay benefits beyond the month you turn 70 years old, as you won’t see any increase in benefits for continuing to wait. It’s better to pay a relatively high tax rate and receive something than to wait and receive nothing. Those planning to take spousal benefits likewise shouldn’t wait beyond their full retirement age, when they max out.

Overall, January is a popular month to start Social Security for good reason. But you have to know the reasons why to make sure it’s a good choice for you.

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