“When should I claim Social Security benefits?” Our clients ask this question often. Of course, as dutiful advisors, this is a planning element we begin to evaluate proactively as soon as our clients are nearing the age that this decision needs to be made. Unfortunately, as with many things in life, things are more complicated than they appear. It also doesn't help that there are a myriad of articles and opinions that don't evaluate the question from the same perspective, much less draw the same conclusion.
Here at Destiny Capital, our analysis for determining the right strategy for our clients considers the following factors: 1) break-even analysis, 2) portfolio withdrawal needs, 3) earnings test, and 4) planning for married couples. For this article, we will be focusing on break-even analysis.
If you claim at your full retirement age, then you are eligible to receive your full benefit. If you claim early, which can be as soon as age 62, you receive a reduced benefit. If you delay, you can earn delayed retirement credits up to age 70. So, by claiming early, your benefit is smaller, but you collect it over a longer period of time. If you delay, your benefit is larger, but you collect it over a shorter period of time.
The reduction or increase in your benefits is actuarially determined based on your life expectancy; if you live as long as you are expected to, then your cumulative benefits will be the same whether you claim early or delay claiming.
Our clients also ask at what age they will break even on Social Security. This will vary depending on several assumptions: cost of living adjustment, potential rate of return on investing the benefit (or not spending down a portfolio), and tax rates. Generally speaking, if you use reasonable assumptions, studies show the break-even age is usually between 82-84. This can vary a bit, but that is where most people land. If you think you will live past your break-even age, your cumulative benefits are higher if you delay. If you have reason to think you won’t make it to your break-even age, you are better off claiming early.
Something interesting to note about life expectancies is that the longer you live, the longer you are expected to live. A person born today in the United States has a life expectancy of about 83 years old. However, if that person lives long enough to claim Social Security benefits, then the life expectancy is closer to 88 years. Therefore, the average person that lives long enough to claim social security is expected to live past their break-even age. Also, women tend to live longer than men.
Of course, no individual can predict if they will survive beyond their break-even age, but here are some factors to consider: current health, lifestyle, family history, and personal sensitivity to longevity risk (the risk of outliving your assets.) Feel free to contact us if you would like to talk through any of these factors.
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