7 Key Points to Ponder Before Delaying Until Age 70
By Michael E. DeMassa, CFA, CFP®
In contrast to what most academic papers suggest, when it came time to advise my mother on her Social Security benefits, the decision was clear. Throughout my career, I had read numerous financial planning articles crunching hypothetical numbers indicating that the average American worker would be “better off” if they delayed benefits until age 70. In practice, the average age is around 65 for starting benefits. So why the difference between theory and practice?
Here are seven key points to consider when deciding when to begin Social Security:
1) A bird in the hand is worth more than two in the bush
There are no guarantees in life and, whatever the projected numbers show, they are based on assumptions. By delaying benefits, there is a risk that a shorter life expectancy would result in lower lifetime benefits. It is not until many years later that the delayed higher benefit payments can catch up to the amounts that would have been received if taken earlier. While spouses (or ex-spouses) may potentially receive benefits on your work history after your passing, your children and other heirs typically would not. Starting benefits early results in “being right” for several years until the break-even on the higher benefits takes over in the later years.
2) Portfolio drawdown
For many retirees, the decision to delay benefits may result in a higher withdrawal rate on their investment portfolio. While a few years of a higher withdrawal rate can be manageable, the early years of retirement can set the tone for portfolio longevity and success rate down the road. Sometimes, starting benefits early can keep the investment portfolio on a growth trajectory as opposed to spending down assets while delaying Social Security benefits.
3) Interest rates matter
Not too long ago, bank savings accounts, CDs and money market rates were yielding near 0% as compared to the current 5% yields on many short-term fixed investments. Higher interest rate environments may favor starting benefits earlier as compared to periods with lower interest rates. The opportunity for interest earned on assets held should be another factor to consider.
4) Double-check the Social Security statement
The Social Security estimates may assume continued work and, therefore, more credits would be accumulating up until the retirement date. The delayed benefit estimates may be overstated if employment stops earlier than assumed on the provided statement.
5) Married couples may choose different strategies
Couples should plan together; however, the optimal strategy may be split, with one partner taking Social Security early and the other delaying. Differences in income, ages and monthly benefits can swing the decision either way. Delaying the high-income spouse’s benefit could have up to a 1.5x effect for the couple, while delaying the low-income spouse may have little impact overall.
6) Get a health check-up and ask your doctor
Your longevity is a major factor when deciding on when to start Social Security, so ask your health professional about your life expectancy, being sure to discuss your family history. At the end of the day, the longer you live, the more cumulative Social Security benefits you will receive. (But regardless whether you choose early or delayed benefits, staying healthy offers your best possible outcome!).
7) Peace of mind
Running estimates and projections are just numbers on a page. If starting Social Security benefits early helps you sleep well at night, travel more, or live a more fulfilling life, then that can outweigh everything else.
Just like couples can’t actually have 1.94 kids (the national average per family), the factors contributing to your decision on when to begin Social Security benefits will be unique to your situation. It should not be based on average ages or academic studies that may – or may not – be relevant to you. For my mom, a bad health report motivated her decision to start early and, sadly, she passed away only a few years later.
We don’t all get to live to the average life expectancy, so it is important to consider varying scenarios when running projections. Based on my experience of running the numbers for clients, the important factors will become evident during the process. I have yet to meet identical clients with the same portfolio and objectives. Each client is unique, with a different likely outcome. The right choice for one person may not be the right one for another.
If you or someone you care about needs help with “running the numbers” for Social Security or other retirement planning projections, please contact us HERE.