Few things are certain, yet Social Security retirement benefits are among the safest sources of retirement income: Inflation-adjusted monthly benefits backed by the federal government for as long as you live.
Sounds good, doesn’t it? Yet, the majority of Americans claim their lifetime benefit before it reaches its highest amount, while just 5% to 6% wait until they are 70.
Is it better to wait until you are 70, or claim a little earlier and invest the money?
Planning is the surest way to make the right decision for you. Yet, many forego mapping out a strategy that can make the difference between some guaranteed income and the vagaries of the equity markets.
Read: How your 401(k) can act as a ‘bridge’ until you claim Social Security
The earliest you can claim Social Security is at 62. You can claim as much as 30% more by waiting until your full retirement age. For those born between 1943 and 1954, full retirement age is 66. For those born after 1954, full retirement age increases incrementally by two months until it reaches 67 for those born in 1960 or after.
Those who wait until 70 to claim receive what are known as delayed retirement credits for each month they wait past their full retirement age.
“When you wait a year, your monthly payment goes up by 8%,” says Roger Young, senior retirement insights manager. However, “it doesn’t mean you are getting an 8% return on your money.”
Waiting to claim is not for everyone. Those who need the money to cover their monthly expenses are in a different position. “The number one thing (to consider) is: Do you have the cash you need today? That’s really what dominates your decision about when to claim,” says Daniel Lee, director of financial planning and advice at BrightPlan, a financial wellness benefit provider based in San Jose, Calif.
Others who have an illness or condition that may to shorten their lifespan may want to claim earlier or as early as 62. Yet, others can plan ahead so they have at least an adequate cash flow that allows them to postpone claiming until 70.
What about those who want to claim Social Security retirement benefits earlier so they can invest the money? Experts caution against this strategy.
“Think of Social Security as insurance rather than an investment,” says T. Rowe Price’s Young. “Money to help you make sure you don’t run out. Think about your life expectancy.”
If you claim earlier, “you’re trading guarantees — guaranteed lifetime payments with COLAs (cost-of-living adjustments), a government program, for the volatility of potential profits,” says certified financial planner Brent Neiser, CEO and host of What’s Next with Money, and a former chair of the Consumer Advisory Board at the Consumer Financial Protection Bureau.
Claiming early to invest the money is “a risky strategy,” Lee says. Just because the equity markets have performed well during the past few years, except for the March 2020 precipitous drop during the early days of the pandemic, doesn’t mean that trend will continue.
“Capital markets appear poised to enter a new era of lower expected returns,” according to the T. Rowe Price U.S. 2022 Retirement Market Outlook report. “Retirement savers and retirees will need to plan and adjust accordingly.”
In contrast, Social Security retirement benefits, especially for those close to retirement, are likely to be there, even if Congress hasn’t yet passed legislation to shore up the Social Security Administration’s long-term sources of funding, experts say.
“It’s a guaranteed stream of income,” Lee says. “It’s a good way to diversify your portfolio.” If you permanently reduce the amount of monthly income you’ll get from Social Security retirement benefits, “you’re concentrating your efforts in the stock market,” Lee says. “Social Security is a good diversifier and source of income.”
Some believe they can earn higher returns by investing the money they claim earlier than 70. “While portfolios could produce higher returns, it is unwise to count on it, especially this close to retirement,” writes economist Wade Pfau, author of the Retirement Planning Guidebook, Navigating the Important Decisions for Retirement Success.
Certainly, those who have considerable savings, if they feel they will not be dependent on Social Security benefits in the years ahead, may be inclined to take more risk in the equity market. They may choose to claim earlier and invest the funds at a more than moderate risk.
One other reason some will chose to claim earlier than 70, Lee says, is “if it can add a good experience to your life” that you might not otherwise be able to enjoy.
Here are some ways to create a bridge that allows you to wait longer to claim:
Consider a claiming strategy for couples. If you’re in a married couple, the lower income earner claims first — at least waiting to full retirement age. “That’s the bridge,” Neiser says. The higher income earner waits until 70. When either spouse dies, the surviving spouse will receive the higher amount of Social Security.
Withdraw funds from your 401(k). Everyone won’t feel comfortable withdrawing funds after saving for many years. Yet, it can be a bridge to later Social Security claiming:
It would be “necessary to withdraw more until Social Security starts,” writes Pfau, “but retirees can then withdraw less after starting Social Security.” This strategy is not “fool proof,” he notes, because if a portfolio drops in value early in retirement, it can lock in losses.
Use funds from a cash allocation. “If you have cash stashed in the 401(k) plan you can use that money so you don’t have to sell equities that may be at a low point,” Neiser says. You won’t have to “worry about a downturn in the market.” Alternatively, if you have large rainy-day/emergency funds of two years’ of living expenses, for example, consider spending from there. “We would sell from stocks or bonds and replenish their emergency fund if they use that cash” while they delay claiming Social Security, Lee says.
Send dividends to your checking account. Rather than have all dividends reinvested, consider having some dividends linked directly to your checking account. “Dividends are very helpful,” Neiser says. “In taxable accounts, you can elect not to reinvest dividends.” For example, if you need funds to pay quarterly estimated taxes, dividends as well as capital gains can be sources. However, some companies have suspended or cut dividends during the pandemic.
Claim a pension from a previous shorter-term job. If you worked for multiple employers during your career, some may have offered a “micro pension,” based on shorter-term work, Neiser says. This can be used in combination with other approaches discussed.
Get a part-time job. “Engage in some type of part-time work,” Neiser says, as well as using a combination of the other strategies described above.
Harriet Edleson is the author of 12 Ways to Retire on Less: Planning an Affordable Future (Rowman & Littlefield, 2021), and writes for The Washington Post Real Estate Section.