3 Reasons Not To Delay Social Security

You've been told that for every year you delay claiming social security, your benefit increases. That is absolutely true up until age 70. You may have also heard from the financial media that delaying benefits nets you a higher overall benefit. That is a little less true, but it depends on a few factors like longevity and the cost of living adjustment social security recipients gain over time.

But, no one should ever blindly follow generic advice without a thorough look at their personal situation. Here are three compelling reasons you might want to claim before age 70.

HEALTH

More than one of my clients has told me they don't expect to reach the average life expectancy. This is important because delaying claiming means you must stick around long enough to recoup the lost years in your 60's you could have been receiving benefits. This takes time, and not everyone has that.

In the cases I've worked for clients, normally I see a breakeven point somewhere in a client's early to mid 80's. For example, in order for a claimant to maximize the overall benefit by delaying to age 70, that person must usually live into at least their mid 80's to allow for enough overall benefits to accrue.

PORTFOLIO HIT

Assuming you retire before age 70, delaying social security comes at a cost. That cost is usually a significant reduction in portfolio assets to fund living expenses. If retirement assets aren't large enough to buy your way to age 70, you might burn through more of your investment accounts than desired before benefits begin.

To illustrate, I ran a hypothetical scenario on myself and my wife. I changed our birthdays so that we'll reach our Full Retirement Ages in 2022. Based on our mock scenario, look at the portfolio income we'll need to generate to buy our way to a delayed claim date.

click to enlarge

Chart courtesy of GoWealthPro

Portfolio withdrawals from my age 67 through 69 total $229,113. This represents 15% of our hypothetical starting portfolio balance. By not waiting to age 70 to claim, I can theoretically insulate a portfolio against excess loss from distributions. This tactic could come in especially handy if those withdrawals happen to occur during a down market like '07-'09.

If it's important for a couple to pass on as many investment assets as possible to their kids or a charity, then delaying all the way to age 70 can negatively affect that goal. Plus, some retirees just have a hard time spending any of the portfolio they spent decades building, regardless of any asset transfer at death type of goals.

DEEMED FILING

Previously, married couples were allowed to receive spousal benefits while letting their own benefit grow by delaying. For workers entitled to both a spousal benefit as well as their own, it was previously possible to receive the higher benefit even if the retiree hadn't yet reached full retirement age. The worker was "deemed" to have qualified for whichever was the higher benefit (either theirs or their spouse's).

Under the new Bipartisan Budget Act (November, 2015), you can't do this until you reach full retirement age. Technically, the new rule doesn't lower the amount of benefit you qualify for, either yourself or as a spouse. But it does restrict the time you could be enjoying a higher spousal benefit prior to your full retirement age. This new provision effectively eliminated the Restricted Application strategy.

For some retirees, they may still be better off claiming their own benefit prior to full retirement age. The Deemed Filing rationale is now highly contingent on how the Health & Portfolio Hit mechanics play out.

Yeah, this one is a mess.

COMPLICATED

Social Security filing is more simple than it was 12 months ago. Even though our beloved Restricted Applications and File & Suspend strategies have been eliminated, determining the timing and sequence of when a couple claims still warrants a close look. To prove this, lets revisit the scenario on myself and my wife. Our numbers actually favored the following unexpected strategy:

1. Melissa (my wife) begins benefits at full retirement age (66 years, 4 months).

2. I claim at age 69.

3. Melissa switches over to spousal benefits when she turns 68.

4. Melissa switches to survivor benefits when I die first at age 85.

This combination of Social Security moves represents a "maximization" strategy. It beats claiming at the earliest opportunity (age 62), claiming at both of our full retirement ages (the No Strategy comparison in the chart below), as well as delaying all the way to age 70. In fact, our maximization scenario beats claiming at full retirement age (what most people do) by $146,000, assuming we each expire at age 85.

Chart courtesy of GoWealthPro

Social Security claiming maximization strategies are dependent on assumptions. However, it's still reasonable to believe looking at two or three likely scenarios is a much better way to approach your claiming decision than blindly picking an age based on what you've heard.

Numbers don't lie, so it's worth your while to spend some time researching what is likely to work best for you. If could be the difference between a few extra hundred thousand over your retirement!

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