I recently had a conversation with a friend who is a few years from retirement. He said he is planning to claim benefits at his full retirement age (FRA) of 66 regardless of whether he is still working or not. He is in what I call the “take the money and run” camp—those who want to claim benefits at FRA or sooner—some as early as age 62.
There is a second camp. It’s comprised of those who intend to wait until age 70 to start receiving benefits, or perhaps sometime between their FRA and age 70. (There is no benefit to waiting longer than that.) I call them the “let it ride” camp. (There are also those somewhere in the middle, but let’s assume they are in one camp or another, depending on whether they want to start benefits closer to age 62 or age 70.)
The “runners” might say that, although they give up some future increases, they end up receiving benefits longer, which makes up for it. Those in the “riders” camp believe it to be a better strategy because it will increase their monthly benefit by about 8% a year for each year they delay up to age 70. That can result in a 32% higher payout at age 66 instead of age 62, and up to a 76% greater benefit at age 70 versus age 62.
Like many of our personal financial decisions, Christians have much liberty in deciding when to claim Social Security benefits. Paul the Apostle never said, “Don’t ever take Social Security benefits early.” But we still want to be wise in our decision-making. As we shall see, which of these two strategies is optimal for my friend and his spouse (and you and yours) depends on a variety of factors. Therefore, it is not a decision to be taken lightly.
The common grace of Social Security
Although Christians have mixed opinions about it, Social Security is an expression of God’s common grace. Theologian Wayne Grudem says that common grace is “…the grace of God by which he gives people innumerable blessings that are not part of salvation.” Social Security will surely be a blessing to many Christians and non-Christians alike, especially those who have saved very little and have no other sources of retirement income.
For most U.S. workers, participation in Social Security is mandatory (which is the basis for some of the objections). You could think of it as a type of public insurance that is administered by the federal government. It provides specific benefits to regular retirees as well as those who are survivors, disabled, or indigent. At its inception in the 1930s, it was intended to be a safety-net for the neediest seniors and other vulnerable groups, not a “be all” retirement plan for the retired masses.
Statistically, Social Security now provides about a third of the income for older retirees, and over half need it for more than 50% of their retirement income. That means that a large segment of the retired population would be in big financial trouble without it. Therefore, the decision of when to start receiving benefits is one of the most important ones you will make. However, if you are married, it is equally important to have a “couple claiming strategy” to maximize your benefits based on your situation.
Before I go further, I want to note that this article is about the primary beneficiaries’ early versus delayed benefit claiming strategies, not all aspects of the more complex spousal benefits claiming strategies. However, there are some important things to keep in mind relative to your “couple claiming strategy” in this context.
A beneficiary’s spouse who is eligible for both a spousal benefit and their own based on their own record will generally receive the higher of the two. Therefore, both spouses must coordinate their claiming strategies. That is especially important if a spouse is eligible for a spousal benefit only. As such, they will qualify for 50% of their spouses benefit while they are living, and then a larger survivor’s benefit should their spouse predecease them. Because there is a 40% chance that one of them will live to their early- or mid-90s, in general, the higher earner’s decision about when to claim benefits takes on additional significance. Delaying, perhaps to age 70, ensures their survivor’s benefit would include the delayed retirement credits.
If you were around then, your spouse would probably say, “thank you for loving me in that way.”
Isn’t postponing a no-brainer?
Given the higher payout percentages and survivor benefits for delaying that I cited above, postponing seems like a no brainer, right? Well, not necessarily. There are some excellent reasons not to. Those with serious health issues might consider claiming sooner as an early death would negate the benefits of postponing. Also, spending additional income (to replace what you would have received from Social Security) from an investment portfolio (instead of working) while delaying benefits could increase sequence of returns risk at the worst possible time (early in retirement). The smaller the portfolio, the higher the sequence risk.
Then there is this: According to the Social Security Administration (SSA), “If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.” In other words, the SSA makes average payouts over average lifespans based on their actuarial table averages, which helps make the whole system work (somewhat, anyway).
Applying that logic (that you will live an “average” length lifespan), you don’t benefit much from delaying. Furthermore, you miss out on the income you could have had from age 62 or 66 to age 70. However, this logic starts to breakdown if you assume you might live longer than your actuarial average, and many will. According to the SSA, “About one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95.”
The longer you live, the more your retirement will cost. Therefore, retirees (or their survivors) who live a long time will probably need extra income later in life. In other words, taking early benefits will reduce the monthly income of those who die sooner than average, but their total cost of retirement will also be lower. However, postponing will increase the income for those who live longer—when they need it the most.
It’s about more than lifespan
Although I prefer the “let it ride” strategy for most people, there are other factors to consider. The optimal claiming decision for almost everyone should consider all the different elements of your retirement plan. It isn’t just a matter of guessing how long you will live or how to maximize benefits over a long life. It also depends on how Social Security will work with your other income sources (savings, pension, annuity, etc.), or lack thereof.
For example, someone with limited savings and no other income sources, who wants to retire and then do no work for pay, probably can’t afford to delay. Social Security income will be needed to cover necessary living expenses. However, someone who has sizeable savings won’t be as dependent on Social Security benefits to cover their essentials. In that case, it might make sense to claim later and to treat Social Security mainly as a form of “longevity insurance.”
Then there are those with a nice pension, who also qualify for Social Security benefits, and may even have some savings. They would be less dependent on Social Security to cover basic expenses or to help deal with increased living expenses late in retirement.
Finally, those with a conservative risk tolerance who invest in things like investment-grade bonds, treasuries, and income annuities, may have less risk of running low later in retirement if they can generate enough income to live on. If so, that may make postponing less attractive.
Leaving money on the table
It can be hard to leave money on the table in the short-term, even if we think it is the right decision in the long-run. The federal government says, “Hey, you’ve worked hard and paid into the system all your life, so here’s a monthly payment, starting as soon as age 62, to help you with retirement for the rest of your life.” It’s hard to say then, “No, no; you keep your money for now…I could really use it to help meet my current expenses, but I know how much more valuable it will be later on when a larger benefit can help with increased expenses or loss of savings.”
The ability to meet current expenses is always of primary concern; early in retirement, but all the more later on when the loss of standard of living can occur due to inflation, investment losses, and increased health care costs. Those with lower Social Security benefits will face the risk that they will not be able to meet their necessary expenses.
The “let it ride” strategy, which maximizes benefits should you live a long life, can, therefore, help mitigate the risk of a decline in your standard of living later in retirement. The longer you live, the more helpful it could be in that way. It does so by helping to maintain a guaranteed income “floor” that increases with inflation for as long as you live.
There is a highly-touted retirement income planning strategy called “establishing an adequate income floor with an upside.” It uses a combination of Social Security benefits, fixed income annuities, pensions, and the like, to secure an income “floor” to protect against the double whammy of a very long life and poor investment returns, investing what’s leftover for some potential upside and liquidity. If your “income floor” is inadequate, then Social Security benefits function much like inflation-adjusted immediate and deferred income annuities. The longer you delay, the larger the “annuity” payments in the future.
Let it ride
On this basis, I will stick with my original position which is that, in the majority of cases, postponing the claiming of benefits, especially for the higher-earning spouse, for a long as they can, is the best strategy. But if you need the income now to meet basic expenses, then there is no decision to be made.
The underlying rationale for my position is this: If you live a long time, you will be better off financially; but, if you don’t live a long time, you will be better off claiming them right away. Moreover, if you need benefits right away, you have to request them right away. The challenge is that to decide you have to (in a way) assume that either you will or you won’t. However, most people have no idea how long they will live—only God does (1Jn.3:20).
It would be helpful to remind ourselves that Social Security is a form of insurance. And insurance isn’t based on average—we don’t insure our homes, our cars, our health, or our lives based on average costs or average lifespans—we most want to protect ourselves from catastrophic losses, not average ones. We pay those insurance premiums, not mainly so that we can file a claim for some nominal loss (although that is one of the benefits of insurance), but so that we can avoid a potentially catastrophic financial outcome.
Social Security works the same way. We accept a loss (perhaps in the form of reduced Social Security benefits in the short term) so that we can, in return, protect ourselves from an unlikely but potentially disastrous financial situation later in life. If you delay benefits, it’s akin to purchasing additional longevity insurance. The “premiums” are the foregone benefits you could have received starting as early as age 62.
In the context of retirement, a “catastrophic outcome,” is becoming impoverished in old age. But I will be the first to admit that this wouldn’t be the end of the world. Friends and family may come to your aid, and you can continue to trust God to meet your needs. However, if God has provided us with a way to buy additional longevity insurance by delaying claiming Social Security benefits (much like we can buy more expensive term life insurance because we now have several children), then wouldn’t it be wise to consider it?
As with any insurance, there is the possibility that we won’t live a very long time (even though we assumed we would), and if not, we have given up those early benefits for no reason; like buying auto insurance and never having to file a claim.
Think of it as “buying more insurance”
A better way to frame this decision is viewing it as the purchase of additional longevity insurance to protect your household against a very long, expensive retirement instead of approaching it as a bet on how long you might live.
Your investment portfolio is a liquid asset with no longevity guarantee — you can outlive your portfolio. If it’s a higher degree of confidence and security you seek, then buy insurance. You can do that by delaying claiming Social Security benefits as long as you can afford to do so, thereby taking the catastrophic scenario—inadequate income in old age—off the table. If your investments go south, you will have been much better off with more Social Security income unless you have other guaranteed sources (such as a pension or annuity, or both).
No matter what, remember that we can only do so much with the wisdom and tools that God has given us; our future hope and security is ultimately in his hands:
For I know the plans I have for you, declares the LORD, plans for welfare and not for evil, to give you a future and a hope. Jeremiah 29:11