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I hate the debate over when to claim Social Security—because it seems to be dominated by folks who fall into one of three camps.
First, there are those who have already claimed benefits, and who insist that their choice—whatever it was—is the right one and that others should follow their fine example. Second, there are those who think keeling over early is retirement’s biggest risk, so claiming at age 62 is the only way to go. Finally, there are the folks who think Social Security is headed for bankruptcy, and the smart strategy is to get whatever money you can while you can. That again means claiming at 62.
Talking to people in these three camps is often a bore because, as far as they’re concerned, there’s only one answer. But in truth, the right strategy will vary from one person to the next, and it’s important not to get bulldozed into making the wrong choice. With that in mind, here are seven guidelines for claiming Social Security.
No. 1: Even if Congress does nothing to maintain benefits at current levels—almost unthinkable, given politicians’ fondness for reelection—benefits would only be cut 17% in 2035, when the Social Security trust fund starts running dry. The upshot: Don’t get scared into claiming benefits early by all the fear-mongering.
No. 2: If you’re in poor health and single, filing early for Social Security benefits makes sense. Similarly, if you’re married and you’re both in poor health, you should probably both claim early. What if you’re in poor health and your spouse isn’t? If you were the family’s main breadwinner, filing early may be a bad decision, even if you’re in bad health—because your spouse will likely end up with a smaller survivor benefit.
No. 3: Because it’s the main breadwinner’s benefit that becomes the survivor benefit, it’s less important when the lower-earning spouse claims. Inclined to take benefits early? You might satisfy that urge by having the lower-earning spouse claim at 62 or whenever he or she stops working.
No. 4: Have you heard folks argue that you should claim early because you’ll spend more or enjoy the money more in your 60s? This argument makes no sense.
First, the goal is to take your retirement “resources” and maximize them over your retirement’s expected length—and claiming early may hurt that goal. Even if you spend more during your initial retirement years, why couldn’t that money come from savings, rather than from taking Social Security early? Second, your later retirement years could prove far more expensive than your 60s, thanks to long-term-care costs. Third, why do folks assume that money will buy them less happiness later in retirement? Does their 60-year-old self really have a good handle on what will make their octogenarian self happy?
No. 5: Filing later may mean you draw more from your portfolio during your initial retirement years, but it doesn’t mean your heirs will get less. Thanks to the larger monthly benefit you’ll have later in retirement, not only will you draw down your nest egg more slowly in those later years, but also that healthy income stream will free you up to invest even more in stocks. The upshot: If you live beyond your early 80s, delaying benefits could end up enriching your heirs.
No. 6: If you opt to delay Social Security benefits so you get a larger monthly check, how long do you have to live for that larger monthly benefit to compensate for the benefits you earlier missed? To my surprise, some contend that such breakeven calculations don’t matter. Really? I find such arguments bizarre. That’s tantamount to saying we shouldn’t care if we make financial decisions that hurt our wealth.
No. 7: Social Security is most comparable to inflation-indexed Treasury bonds—an ultra-safe investment that’s government-guaranteed and inflation-linked. The implication: If you do a breakeven calculation by assuming benefits taken early are invested in the stock market, and then compare that to taking benefits later, you’re making an apples-to-oranges comparison.
Instead, to do a fair comparison, you should assume benefits taken early are invested in high-quality bonds—and this typically puts the breakeven age at around age 80 or 82, depending on current inflation-adjusted bond yields. Live until then or later, and you’d be better off claiming benefits later. For 65-year-olds, the median life expectancy is age 84 for men and 87 for women.
To all this, I’d make one exception: If you’re a 100% stock investor, assuming that you’ll take benefits early and invest that money in stocks seems reasonable. But if you have some bonds—and those bonds will earn less than you could “make” by postponing Social Security—wouldn’t it make more sense to spend those bonds while you delay benefits? The latter will leave you and your heirs better off, presuming you live to the breakeven age.
I struggled over when to take SS, but I ultimately realized that it didn’t really matter. I’m single and my only close relative is my sister, who is 10 years younger. Neither of us is likely to outlive our money regardless of when we take SS., I ended up taking it at my FRA of 66. My sister, who is generally in good health but had breast cancer 3 years ago, opted to take her SS this year at age 65.
I got lucky, my investments since I started SS have done significantly better than inflation, which should delay the break-even point a few years.
For both my sister and me, our decisions of when to take SS won’t affect us, but will, to some extent, affect how much we leave to our favorite charities.
I think you guys are all smarter than I am and you disagree a lot. That tells me my decision to delay taking benefits until age 70 might have been the right one. I’m OK with that.
Thank You – Dave Baese
You hit on one of my two most favorite Difficult topics, Social Security, and the other is Medicare. When I was 62 that is 16 years ago, I made numerous calculations and read all I could to determine what to do along with my wife. I cannot remember all the correct terminology but it was my wife takes her standard SS at 62, and I take a delayed SS at 65, then she gets part of my SS because it is higher and I take mine at the age of 70. This may not be exactly the case but memory fades. At the time, I calculated that what I call breakeven was about 82 years old Johnathan thanks for your article as I now even feel better that my calculations were on TARGET. Keep up your great legacy of articles and continue to discuss these two very difficult topics. Thanks for all you do for Humble Dollar, we appreciate all your fine efforts.