One question that we are asked pretty often is whether it makes sense to delay Social Security, claim on time, or claim early.
This can be a complex question, depending on what other resources you have available to you at retirement, whether you are married, whether one spouse has earned significantly more than the other, and whether you have any health concerns or expect a long life.
Of course, if you don’t have any other resources to draw from, this question is moot. You will probably need to begin claiming social security as soon as you stop working.
If you do have a retirement nest egg available, you are probably wondering whether it is best to start using it and delay social security, or start social security and postpone drawing from your nest egg.
Many influencers on social media and even some other advisors are posting videos arguing that it is smarter to claim early and invest the cash flow than to delay your claim. I recently watched one such video and it wasn’t until 15 minutes in that the speaker finally clarified the linchpin of his claim. I am going to save you that time and lay it out here.
Below I will give you a very simple explanation for why it mathematically makes more sense for most people to delay claiming Social Security. I will also mention a few scenarios when that does not make sense.
Social Security Basics
If you were born after 1960 your full retirement age is 67. If you were born before then, your full retirement age is probably a few months earlier.
At your full retirement age, you can claim your Social Security retirement benefit and get the full amount. You can also earn an income and still receive the full Social Security benefit.
You can also claim as early as age 62. If you claim early, you will receive a smaller benefit forever. Also, if you have any other earned income, your benefit will be reduced further until you reach full retirement age.
If you delay your claim past your full retirement age, your benefit increases. The rate of increase is 3/4 of a percent per month, or 8% per year. This increase is guaranteed under current law, so it does not depend on any market performance. It is also permanent, meaning it sets the baseline for your benefit and any inflation increases will be based on this larger benefit.
Why It Usually Makes Sense to Delay Your Claim if Possible
The reason why it makes sense to delay your Social Security claim is that there is no guaranteed or “safe” way to earn an 8% return on an investment portfolio. While stocks often return more than 8% per year, most retirees are in a portfolio with a mix of stocks and bonds, and the average annual rate of return on a moderate or conservative portfolio is projected to average something less than 8% per year.
When planners project out your retirement income and expenses for the rest of your life, the result is generally better if Social Security is delayed as long as possible, and other assets or income sources are used until age 70.
When you see videos encouraging you to claim early and invest the cash or let your assets grow longer, there is an assumption that your portfolio will return more than 8% per year. This is far from guaranteed.
This is why we often (but not always) recommend that our clients delay their Social Security claim.
When Delaying Might Not Make Sense
Of course, there are many exceptions that prove the rule. As I mentioned at the beginning of the article, some retirees don’t have enough retirement savings to support a long period with no income. In that case, it will be necessary to claim social security sooner.
Another exception would be if your life expectancy is not very long. In order to benefit from delaying your Social Security claim, you need to live into your 80s. If that is not likely, it does not make sense to delay.
A third exception is for a married couple when one spouse has a much smaller projected Social Security benefit than the other spouse. In that case, it makes sense for the spouse with a smaller benefit to claim at their full retirement age. Their benefit will automatically increase to 50% of the larger benefit once their spouse claims at age 70.
I hope that this helps clarify why it often makes sense to delay your social security claim. Now when you see a headline or a social media post claiming that you are losing money by delaying social security, you will know how they arrived at that conclusion and you can save yourself the time!
Together Planning is a registered investment advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Together Planning has a reasonable belief that this marketing does not include any false or material misleading information statements or omissions of facts regarding services, investments, or client experiences. Together Planning has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.