When it comes to making a decision about when to claim Social Security benefits, retirees have to weigh two competing interests. Claiming early allows them to receive those monthly checks for longer, but delaying will make those checks bigger. In order to make delaying worthwhile, a person has to live long enough to offset all those years they went without their benefits.
For most people, though, waiting until age 70 is the best choice for one simple reason.
Social Security is insurance against outliving your savings
The benefit reductions and delayed retirement credits for Social Security are designed based on actuarial tables, which makes the expected value of total benefits roughly the same for someone claiming at 62, 65, 67, or 70 years old, all else being equal.
But how would you feel if you fully retired and claimed Social Security at 62, took the reduced benefit, and then lived to be 100 years old?
Most retirement plans are designed for a 30-year retirement. The famed 4% rule was only tested against a 30-year period. Living an extra eight years could present a serious financial challenge.
Not only that, but if you claimed early and then lived to 100, you'd have to live with the fact that you shortchanged yourself significantly. The 100-year-old that claimed Social Security at age 62 will have received about 73% of the benefits of someone who delayed until age 70.
There's certainly a risk that you won't live long enough to come out ahead by delaying your benefits. Statistically, nearly half of all people won't. But there's also a risk in outliving your savings.
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Consider Social Security a part of your retirement portfolio
Delaying your Social Security benefits until age 70 isn't always the easiest thing for retirees. The first six months of 2022 were one of the worst periods for the traditional 60/40 portfolio composed of 60% stocks and 40% bonds. Both asset classes fell in value during the first half of the year.
That's led many retirees to consider using Social Security benefits in order to avoid withdrawing assets at depressed prices. But that would likely be a mistake.
The mistake stems from considering Social Security as something other than another asset in your retirement portfolio -- something extra. But Social Security is just a pension or a fixed-income asset.
Retirees need to treat Social Security as part of their overall portfolio and factor it into their asset allocation. Doing so will allow them to invest with an asset allocation that has a greater expected return over the long run.
And delaying Social Security offers one of the highest risk-adjusted returns of any asset class. Not only does it earn an extra eight percentage points per year (up to age 70) after reaching full retirement age, but that adjustment is also on top of inflation (for which Social Security benefits are adjusted every year whether you've claimed them or not).
If you consider Social Security as part of your overall asset allocation, you'll find a larger portion of your portfolio is actually allocated to fixed income. Continuing to delay benefits while stocks are down will allow you to shift more of your money from bonds to stocks in your investable portfolio, capitalizing on the depressed prices. That means there's no need to claim Social Security earlier just so you can avoid selling stocks today.
Fully considering the value of your Social Security benefits will allow you to more easily delay taking those benefits while maximizing the returns of your retirement portfolio with proper asset allocation. That provides even more protection against living longer than planned in retirement.
