Soon-to-be retirees face a dizzying array of trade-offs when it comes to timing their Social Security claim. Previously, we made the case for delaying benefits as long as possible: the longer you wait, the bigger monthly check you’ll receive—particularly when inflation rears its head.
But inflation isn’t the only factor. Other variables like health and longevity, risk tolerance, and the needs of your spouse also influence your decision. And with each of these variables, investors must decide, “Is it worth the wait?”
The Right Stuff
Deciding when to claim Social Security would be a lot simpler if you knew how long you’ll eventually live. While genetics play a role, today there is a 50% chance that a 65-year-old man and woman in excellent health could live to ages 88 and 90, respectively (Display).i Essentially, those are the odds of a coin flip. There is also a 25% chance of living to ages 94 and 96, respectively—or that at least one spouse will live to see age 98.
As we demonstrated earlier, the longer you live, the bigger the benefit from deferring your claim. In fact, delaying your benefits until age 70 can be thought of as a longevity hedge against outliving your assets.
Reassess Your Burn Rate
No one wants to outlast their wealth, which introduces another key factor to consider when claiming Social Security: spending. Here, it may help to think of your assets as two separate pools. Should you spend from Social Security in the hope your portfolio appreciates or spend from your portfolio and let Social Security grow?
The answer partly depends on cash flow. If waiting until age 70 will severely deplete your liquid assets, you might accept smaller benefits to preserve some liquidity. The flip side—postponing your claim—means spending a larger portion of your portfolio sooner. That may work well in strong markets, but less so during downturns when big holes make it difficult to catch up. To lessen that likelihood, some investors set aside a conservatively positioned “bucket” to fund initial spending until Social Security kicks in.
Return assumptions also feature prominently. By deferring your claim and spending from your portfolio, you forfeit some growth potential. This may not matter as much to those with a conservative risk profile. In fact, the more conservative your allocation, the more it pays to delay your claim until age 70. On the other hand, claiming early may be a better solution for those targeting aggressive growth versus holding out for a larger Social Security payment.
Can Your Spouse Afford to Wait?
Besides inflation, your spouse may be the biggest wild card in the equation. Here, several factors come into play, including your spouse’s age (relative to yours) and their earnings history/benefit eligibility.
Even if your spouse never worked and isn’t entitled to their own Social Security benefits, they can begin collecting spousal benefits based on your earnings as early as age 62. The longer your spouse waits to claim, the higher the benefits. Claiming at age 62 reduces the amount to 32.71% of your full retirement benefit. That percentage increases to a maximum of 50% of your benefit if your spouse starts collecting at their full retirement age (Display).
When it comes to your spouse’s needs, keep the following in mind:
- Unlike when the primary earner defers, your spouse will not receive credits by claiming after their full retirement age (age 67, if born after 1960).
- Spouses can only receive spousal benefits if their partner has commenced receiving their worker benefits.
- Anyone born on January 2, 1954, or later who claims their benefits is deemed to have filed for them in their entirety. You can no longer file a “restricted application” at full retirement age, which lets you receive spousal benefits while delaying your worker benefit.
- If the primary earner delays their worker benefit until age 70, their spouse will also be waiting until that date to begin receiving any spousal benefits—without any increase if they have reached their full retirement age.
Optimizing Survivor Benefits
Your spouse is also entitled to a survivor benefit if you pass away. Survivors can claim benefits as early as age 60 or delay until their full retirement age, with varying impact on the amount they’ll receive. For example, a survivor who claims at age 60 will receive 71.5% of the deceased spouse’s benefit or 100% of the benefit by delaying until full retirement age.ii
As with spousal benefits, survivors don’t earn delayed credits by claiming after full retirement age. However, if a deceased spouse waited past their full retirement age, the survivor could receive those credits by claiming survivor benefit after their full retirement age.
There are other factors to consider when it comes to survivor benefits, such as whether you remarry, and when and whether you are eligible for your own retirement benefits. For example, if your worker benefit exceeds your survivor benefit, you may claim survivor benefits as early as age 60. This allows you to earn delayed credits on your worker benefit, which you can then switch to at age 70. Ultimately, if you defer your benefits to age 70, it may provide more total benefits over time and a larger survivor benefit stretched over your spouse’s lifetime, but it could delay your partner from receiving spousal benefits.
Many Aspects to the Claiming Decision
When it comes to timing Social Security benefits, there’s no one-size-fits-all answer, though it helps to keep the following in mind:
- Are you still working and have yet to reach full retirement age? If so, delay claiming benefits to at least your full retirement age as your earnings may reduce your benefits until you reach that point.iii
- Are you healthy with a family history of longevity? If so, consider delaying benefits to age 70. If not, consider taking benefits at your full retirement age or earlier (provided you’re not working).
- Is your spouse younger than you? Will he or she receive spousal benefits? If so, consider delaying to age 70 so that your survivor benefit can be stretched over your spouse’s lifetime.
- Do you tend to invest conservatively? If so, delay claiming benefits to age 70.
- When you retire, will you be sensitive to inflation? If so, consider delaying to age 70 to lessen the bite and provide better inflation protection.
Given the number of trade-offs involved, speak with your Bernstein financial advisor. He or she can help you assess your personal situation.
- Andrew Bishop, CFA
- Director—Wealth Strategies Group
i Source: https://www.longevityillustrator.org. Assumes 65-year-old couple, non-smokers, in excellent health.
ii Full Retirement Age for survivor benefits is different than when claiming worker or spousal benefits.
iii If you are younger than your full retirement age for the entire year, the Social Security Administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit of $19,560. In the year you reach full retirement age, the Social Security Administration will deduct $1 in benefits for every $3 you earn above $51,960. The Social Security administration will only count your earnings up to the month before you reach your full retirement age.