When most people approach their full retirement age (either 66 or 67 depending on when you were born), many are faced with a decision – should I claim my Social Security benefits now or should I wait until age 70? Most begin benefits sooner rather than later due to liquidity needs, poor health or concerns about the future of Social Security. Additionally, there is a social norm linked with claiming benefits right at retirement due to the easy transition of replacing work wages with a Social Security check. However, a different perspective to take is this – which strategy will increase the likelihood of achieving your retirement goals? Below are some important factors to consider when deciding.
Claim Today, Invest for Tomorrow? Most of us understand the Highest and Best Use concept, where it is beneficial to allocate money to resources that can earn the highest value. If we collect benefits at age 66 and invest those benefits over time, would this be more advantageous than waiting to claim at age 70?
Every year you delay benefits, you receive approximately an 8% increase in your benefit, up to a maximum of 32% (24% if your full retirement age is 67). However, this can be misleading because the benefit increase does not compound; it accrues at the same rate each year. So, if we were to calculate the compounded rate of return, it is approximately 5.7% annually (5.5% if your full retirement age is 66). If someone claims benefits at 66 versus 70, lives until age 90 and factors in an annual 1.5% Cost of Living Adjustment, you would need to earn an average of approximately 5.6% annually in your portfolio until age 90 to come ahead. So, do you think that your money will be better off invested in the markets?
Since March 2019, we have experienced the longest bull market in U.S. history and in June we will have reached the longest economic expansion in U.S. History. The markets have been good to us, providing an 8% average return for a 60% stock / 40% bond portfolio. Can we expect this moving forward? Probably not. Read more on this here.
Rule of Thumb: If future investment returns over your retirement period are expected to be low, delaying benefits might be preferential.
Portfolio Size Matters. Claiming at age 66 or 70 can be beneficial or detrimental depending on the size of your nest egg at retirement. If your portfolio is modest and you delay benefits until age 70, your retirement expenses will need to come from your portfolio alone during those first four years which can cause an additional strain on your portfolio. Alternatively, if a portfolio is substantial, claiming at age 66 can be detrimental over the long run due to lower annual Social Security benefits, which will create larger continuous withdrawals from your portfolio throughout your retirement.
This decision is completely based on the Social Security benefit’s ability to share the burden of retirement withdrawals in order to keep an investment portfolio afloat. There is a fine line with how much water a boat can take before sinking. The same goes with your portfolio and taking withdrawals.
Rule of Thumb: For client’s with large portfolio balances, delaying your Social Security benefits might be preferential.
Life Expectancies/Marital Considerations. If you expect to live a long life, it generally makes sense to delay your benefit. Typically, one who delays their benefit until age 70 will have to make it past at least age 83 to come out ahead by delaying benefits versus claiming at full retirement age.
Alternatively, if your Social Security benefits are much greater than your spouse’s benefit, it might make sense to delay your benefits if you expect to predecease your spouse. Spouses with low Social Security benefits are generally entitled to 100% of the deceased spouse’s benefit (called a survivor benefit) which can make a substantial difference for increasing portfolio longevity.
Rule of Thumb: If you expect to have a longer than average life expectancy or if your spouse has low benefits and you expect to predecease them, delaying your Social Security benefits might be preferential.
The important take away is that there are a multitude of options for choosing your ideal Social Security claiming strategy that can have an impact on your retirement goals. It is also important to realize that this is meant to provide only a general direction and something to think about. We encourage all who have questions to please call us and we would be more than glad to discuss the right Social Security claiming strategy for you.