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Social Security: Later Can Be Better

Doug Carey, CFA

Key Points 

  • Very few people wait to take Social Security at age 70 or later.
  • Retirees with a decent amount of investments probably should wait until that age.
  • Social Security might be thought of as the safest annuity you can buy--and already have bought. 

We recently came across this statistic via the Motley Fool: "only 4% of women and 2% of men claim [Social Security benefits] at 70 or later, according to a report from the Center for Retirement Research at Boston College. The most popular age to claim, the study found, was age 62, with 48% of women and 42% of men claiming at this age." 

We can't let this go without a few comments. 

If you absolutely need the money, then by all means, take the benefits early. 

First, ask yourself: Do you really need the money as soon as you're eligible? The answer to that question might be a little complicated. If you don't have any investment assets, then yes, you probably need it right away (if you don't have a pension); if you have lots of investment assets, then no, you probably don't. 

But a lot of us are somewhere in the middle. We have investment assets, but we're not entirely confident they're going to be enough to carry us through retirement. Or we might have concerns about selling assets we've spent decades accumulating. Those concerns might have to do with realizing capital gains and paying taxes on those gains. But they might have to do with the idea of reversing course after all those years. Good habits die hard; spending down assets just feels wrong. 

It's not wrong, though. In most cases, holding off on Social Security and tapping your investment assets instead is the way to go. We'll explain why. 

The Annuity You Already Own

Social Security can be thought of as an annuity. There are all kinds of different annuity types, but generally speaking, you pay into it, and then, down the road, you get it back--with interest, maybe, or with a survivorship benefit (as in, when you die, your spouse continues to get paid). 

Some people love annuities and some people hate them, but if you have been paying into Social Security, you basically already own the safest annuity imaginable. And, at or near retirement, it would cost a lot of money to purchase such an annuity on the open market. 

Here's an example of what we're talking about. Using our calculator, we ran a scenario showing the difference in benefits between taking Social Security at 66 and 70 for a person who made $85,000 a year in salary. That difference is substantial--about $9,000 annually, or a 35% increase for waiting.

When to take Social Security benefits at a later age

Social Security at any stage can be thought of as an annuity. But let's talk about that $9,000 gap for a minute. If, at 66, our retiree wanted to buy an annuity--not Social Security, but an annuity from an insurance company--that would cover that $9,000 annual difference annually, with a survivor benefit, it could cost around $175,000. 

Maybe you can see where we're going with this. If our retiree instead simply drew down an extra $9,000 annually over those four years, for a total of $36,000--or let's call it an even $40,000 to cover taxes--she could save herself about $135,000. 

Sometimes, however rarely, spending is saving. In this case, by drawing down on their retirement savings, our retiree is increasing the probability of a successful retirement (that is, one where they don't run out of money) by not having to seek out an alternative--and expensive--source of income on which to get by. 

Other Factors

Of course there are other factors involved in the decision about when to take Social Security. All of retirement planning involves a lot of moving parts, but the decision about when to take Social Security is often seen as the most fraught. 

As we alluded to at the beginning of this article, there will be cases when a person will simply need the money earlier. Sometimes in WealthTrace, we see plans where there's a projected shortfall, but if we move the date of Social Security up, things look a bit better. This might happen if, for example, a major expense is anticipated in the early years of retirement. 

Running out of money before Social Security benefits begin

It's still not going to be ideal. In most cases where this happens, the end-of-plan value is not going to be as high as we'd like to see--there's not enough of a margin of safety. But at least the person is less likely to run out of money entirely, which was kind of the purpose of Social Security in the first place. 

Another factor is political. Many fear that Social Security benefits might be cut in the future because the trust fund is projected to run out of money in 2034. But the federal government is allowed to use money from other sources to cover shortfalls. They can also raise the full retirement age for the younger generation and the cap on income that is taxable for Social Security purposes. These are more likely than benefits being cut across the board. 

Even Steven

Here's a brief aside. You should be aware of the concept of the Social Security break-even age. Investopedia does a nice job of covering it, but the basic idea is this: How long do you need to live to "make up for" delaying taking your benefits? 

In the image above from the calculator, the breakeven age is 83. This is basically saying you'll need to live to 83 to get to the point where you make up for having taken your benefits earlier. This can be a valuable piece of information, especially for people who feel they have a good handle on their life expectancy. In this case, if the person does not believe they'll live that long, it could make more sense to take the benefits beginning at age 66. On the other hand, if family genetics indicate that she will likely live past the break-even age, she will probably want to wait if she can. 

Know Your Options

The single-digit percentages of people waiting to take Social Security until they turn 70 are somewhat alarming, but not that surprising given what we know about retirement savings rates in the United States. Regardless, taking a big-picture look at your plan--and running it through a program that can point out some things you might otherwise miss--is a must-do when considering a decision as big as when to begin taking your Social Security benefits. 

Find out how much you need to save in order to retire comfortably. Sign up for a free trial of WealthTrace today. Learn more about how WealthTrace can help you.


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Doug Carey, CFA