When we create financial plans for clients, we analyze the optimal Social Security claiming strategy (based on reasonable assumptions) and present this to the client. Often, we find clients are better off having at least one spouse delay claiming Social Security until age 70 to take advantage of the benefit increase you receive for delaying your benefits. This recommendation is often met with some variation of, "that's nice, but I'd still like to claim Social Security early."
At first, this floored me. Why would anyone knowingly leave money on the table that’s there for the taking? When I probe further, the client usually says, "it just feels better." I quickly realized that deciding when to claim Social security isn't just a mathematical problem - it also has a strong emotional component.
Below, I list the most common concerns I hear from retirees along with my perspective on each. These concerns weigh heavy on the emotions of retirees and often lead to suboptimal Social Security claiming decisions. As you’ll see, each concern has an element of truth to it, but they’re usually blown out of proportion. Acknowledging these concerns and putting them in perspective can ease your worries and help you make the best Social Security claiming decision for your life.
Many people worry that Social Security is going to “go away” because Social Security pays out more benefits than it receives in tax revenues. It funds the shortfall by taking withdrawals from the Social Security Trust Fund, but this is projected to run out around 2033 if changes aren’t made. This leads many people to claim their benefits early so they can “get their money while they can.”
I can understand this concern, but I believe the risk to people close to retirement age is smaller than most people think. Approximately 78% of benefits are funded through current tax receipts. That’s not a huge gap to close and there are numerous adjustments that could be made between now and 2033 to avoid the need to decrease Social Security Benefits. Just to name a few straightforward options, they could: increase the full retirement age, increase the Social Security tax rate, raise the Social Security tax ceiling, implement means testing (i.e. reduce benefits for high-income retirees), or some combination of these things.
If you’re already close to Social Security claiming age, I’m not convinced this is a big enough problem to warrant claiming early if analysis shows you’re better off delaying.
If you delay claiming Social Security, there’s a chance that you’ll die early. If you die before you claim your benefits, you’ll completely miss out on receiving benefits during your lifetime (although your spouse can receive survivor benefits based on your record if you’re married). Even if you make it past 70, you have to live about another decade to make up for the years between age 62 and 70 when you received nothing from Social Security (the “breakeven point” for delaying Social Security from 62 to 70 is approximately age 80).
Missing out on money you could have received doesn’t sound appealing to anyone. But you have to ask yourself, “how likely is it that I’ll die before the breakeven point”? Ultimately, I believe you should make decisions that stack the odds in your favor and accept the fact that things may not work out for you. Fortunately, mortality statistics are available that show the likelihood of someone your age and gender living to a certain age. I recommend a handy tool called “The Longevity Illustrator” that was created by the Society of Actuaries and American Academy of Actuaries. This tool showed a 62-year-old (the earliest age you can claim Social Security), single, non-smoking male in average health has a 70% chance of living to age 80. For a single, non-smoking, average health female at the same age, it’s a 78% chance. Clearly, the odds suggest that an individual in average health is likely to live long enough to benefit from delaying Social Security.
Of course, you have to consider your own health and family history to personalize your life expectancy assumption. If you’re an overweight smoker with major health issues and your parents died young, your life expectancy may be shorter, and you may want to lean towards claiming Social Security earlier. If you’re a healthy, non-smoker, with longevity in your family, you probably have an even higher likelihood of living past the breakeven point and will be more inclined to delay Social Security.
Many people default to claiming Social Security when they retire. This is a necessity for people who don’t have other sources of income.
But, if you’ve accumulated assets to help fund your lifestyle in retirement, you can delay Social Security and withdraw from your investment portfolio to achieve the same amount of total spending you would have had if you claimed Social Security.
Put simply, delaying Social Security does NOT mean you have to live on lower income until you claim your benefits.
As mentioned above, if you don’t want your income to be lower in the years before you claim Social Security, you’re going to have to withdraw enough from your investment portfolio to offset the lack of Social Security benefits. This approach typically involves a high portfolio withdrawal rate in the early years of retirement, which tends to create two fears among retirees: running out of money and missing out on investment returns.
A high portfolio withdrawal rate increases the likelihood of seeing your portfolio balance decline. Seeing a substantial portfolio decline early in retirement can exacerbate the number one fear of retirees: running out of money. But, it’s important to remember this high withdrawal rate is temporary, and delaying Social Security will allow you to withdraw less from your investment portfolio every year after age 70. When I build financial plans, delaying Social Security usually reduces the likelihood of running out of money - it’s just scarier on the front end of retirement.
Occasionally, clients will express concern over “foregone returns” on the money that could have stayed invested. It’s important to remember that delaying Social Security is also earning you a return in the form of higher future payments. For example, delaying benefits beyond full retirement age increases your benefits by 8% for every year you delay. This essentially represents a guaranteed 8% return.
Unless you have a very high percentage of your portfolio in stocks (which is unusual for retirees), the long-term expected return of your portfolio is likely less than 8%. If you’re the rare retiree with a predominantly stock portfolio, remember that there is a lot of uncertainty around stock returns. Sure, you could do better than 8% over that time frame, but there’s also a chance your portfolio could do much worse over that time frame. I’ll choose a guaranteed 8% return over a very volatile stock return any day of the week.
You may be getting the impression that I think everyone should ignore the concerns listed above and always delay Social Security. That’s not the case. Ultimately, we should make financial decisions that will allow us to lead the best life possible and a big part of that is minimizing worry.
There’s nothing wrong with allowing emotions to factor into your decision making as long as you’re not jeopardizing your financial livelihood. Shifting Social Security claiming age is rarely a make-or-break issue for a retirement plan, which means many people are free to let their emotions influence their claiming decision. But, you want to make sure your emotions aren’t based on inaccurate, exaggerated information.
Once the concerns discussed in this article are put in proper perspective, many people feel more comfortable delaying Social Security if their retirement plan suggests it’s a better financial decision. If you still feel that claiming Social Security earlier will allow you to lead a happier, lower-stress retirement after reading this article, then that’s probably what you should do even if it’s not mathematically “optimal”.
No matter what, this article should provide you with a better understanding of the issues surrounding Social Security so that you can make a more educated decision about the Social Security claiming age that is best for your life.