When should you take Social Security benefits? That question gets asked over and over, and many so-called experts have their firmly-held opinions. Some have argued that taking the funds early, at age 62, and investing those dollars will let a wise investor come out ahead. But now, a recent study has analyzed that strategy and come up with a pretty decisive answer: most investors are far better off waiting until age 70 to take benefits, because they almost surely won’t be able to match the guaranteed rate of return that Social Security promises.
We found this article in a recent edition of MarketWatch. In it, reporter Jessica Hall takes a look at the research and provides a clear answer that the strategy of taking early benefits and investing the money is less sound than it seems. We know some of you risk-takers out there will disagree, but let’s take a look and see what the data suggests.
A Financial Decision with Life-Long Implications
Writing in MarketWatch, Hall states the obvious. “Choosing when to claim Social Security is a major financial decision that will affect your finances for the rest of your life,” she acknowledges. “So, when’s the best time to start collecting for the best return? The short answer is wait until 70 to claim Social Security.”
As Hall explains, the evidence clearly shows that waiting until 70 beats the opposite strategy. “Claiming [benefits] as early as possible—at age 62—and investing that money still is unlikely to beat the returns seen from waiting for a larger payout,” she asserts. That’s according to a new study in the Journal of Financial Planning.
Returns Above Eight Percent Unrealistic
Hall spoke with retirement expert Wade Pfau who co-authored the study. “Before the study, someone would say ‘invest Social Security benefits and earn 10 percent a year instead of delaying’ as if that were the answer,” Pfau said. “But most people don’t invest 100 percent in stocks and you’re not promised to get those returns.” Pfau should know what he’s talking about: he’s professor of retirement income at the American College of Financial Services and author of the Retirement Planning Guidebook.
“Generally, wait as long as possible and you’ll get a better outcome than investing,” Pfau told Hall. As Hall explains, the study “reaffirmed what Pfau suspected: it’s best to wait until 70 to claim Social Security, if possible, if you want to have a better return and leave the largest inheritance or legacy to your family.”
Delayed Filing Typically Leaves a Larger Inheritance
“If the claimant does not expect to spend down their entire investment portfolio during their lifetime, which claiming strategy ultimately leaves more inheritance?” asked the study in the Journal of Financial Planning. The answer might seem counter-intuitive: you’re better off living off your savings in your 60s if you must, so you can delay and get a larger Social Security payout. “That still makes more sense than taking Social Security early, the study found.”
The delay-til-70 strategy has its doubters, Hall writes. “Proponents of taking Social Security early suggest that a financial adviser could invest the benefits and earn a higher return for their clients over the long run,” says the article. “But Pfau cautioned that that is not common or likely.”
In fact, the language in the study is unambiguous. “Claiming early can lead to a better outcome, but it is not common and should not be expected,” the study said. “People tend to be overconfident about their investing prowess.”
While it’s theoretically possible to beat the 8 percent annual return for 8 straight years, the risk involved is too great, experts suggest. As the study put it, “To generate the returns needed to beat the benefit of delaying Social Security, there would need to be a high tolerance for risk and an aggressive asset allocation, not to mention plenty of discretionary wealth.”
What About Social Security’s Rumored “Demise”?
The MarketWatch article also says some people who advocate early benefits are motivated by fear, not optimism. “Other fans of claiming benefits early worry that the Social Security Trust Funds will dry up and there won’t be funding available when it’s their turn to start collecting,” Hall writes. “The Social Security Trust Funds are expected to be depleted around 2034.”
This risk may be real, as we’ve said many times here on the AgingOptions Blog, but there are other factors to consider. For one thing, because so many rely on Social Security, the odds of a political solution seem high. What’s more, even if the Trust Fund is depleted, benefits will continue, although at a lower level, reduced by 20-23 percent based on estimates.
Even given the risk to the Social Security system, MarketWatch says, the claim-at-62 argument still doesn’t work for most. “While the current underfunding of the Social Security system remains an important consideration, much of the literature acknowledges that there are better planning strategies than simply claiming Social Security as soon as possible in order to get the benefits before they go away,” the study said.
Who Should Claim at 62?
As the article concludes, there are some for whom claiming early makes sense. If someone truly needs the income now, then they have little choice. This need may be triggered by the premature death of a bread-winning spouse, for example, or by other emergencies. “If you had a medical reason, or no alternative funds, claiming Social Security early might be the best choice,” says the article, quoting the study.
Reporter Hall provides some specific examples. “According to AARP, a person born on January 1, 1961, who has averaged a $50,000 annual income would get a monthly benefit of $1,386 if they file for Social Security at 62, or $1,980 at their ‘full retirement age’ of 67 or $2,455 at 70,” she writes. This difference is huge over a 25-year retirement.
“Delaying Social Security can be framed as longevity insurance that helps to support the increasing costs associated with living a long life,” says the study. “It provides inflation-adjusted lifetime benefits for a retiree and a surviving spouse, and these monthly benefits will be 77 percent larger in inflation-adjusted terms for those who claim at 70 instead of at 62.”
Yet with all that as evidence, human behavior suggests people don’t follow logic. “Only 5 percent of men and 7 percent of women wait until 70, according to the Social Security Administration. Over a quarter of men and just under a third of women take Social Security as soon as they are eligible at age 62,” Hall writes.
Nevertheless, Wade Pfau’s advice is clear. “Really, waiting is the key,” he states.
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(originally reported at www.marketwatch.com)