You may be wondering when to take social security. Our retirement planning software will generate the optimal social security timing strategy based on incomes, age, and expected lifespan. And in most cases, for clients with expected lifespans of over 83, the software will push the social security claiming age to 70 due to the roughly 8% starting benefit bump for every year delayed. As clients age beyond the low 80’s the total amount of benefits paid out by SS start to exceed the total compared to starting earlier.
And while we strongly discourage clients from starting social security before they stop working, that doesn’t mean that all of our clients with projected longevity postpone taking payments until age 70. Why not? Well……there are two other factors involved.
Psychological factors
The first factors to consider when thinking about when to take social security are psychological factors. As mentioned above, retirement can be a time where people feel financially vulnerable. While it could make overall financial sense to take money out of savings or retirement accounts in order to delay social security until 70, it may just be too traumatic for clients to take larger than sustainable withdrawals for a few years and then cut back when social security payments start. It can cause clients to delay retirement spending during their potentially healthiest and most active retirement years. If the clients feel more comfortable seeing those payments hit their checking account and reducing withdrawals, then that needs to be honored.
Projected Return Factors
The next factors to consider when thinking about when to take social security are projected return factors. The appeal of delaying social security is the “booking” of a guaranteed return of around 8%. It is conceptually the same as starting investment account with an 8% higher balance. And where else can our clients get an 8% guaranteed return…guaranteed by the US government?
So another factor in the decision has to be… what the expected return is on the investment portfolio from which withdrawals will be taken? In theory, if the projected portfolio return is at near 8% or greater a case could be made for not delaying social security. As of the date this is being written (December 2021), based on current interest rates, relative market valuations and estimated economic growth, many investment firms are projecting 7 year annualized returns of around 4% to 6% on a balanced portfolio – before expenses. So this makes the case for delaying social security.
But what if it was 2001, or 1998, or early 2020 after a large market drop? After those events, long market returns going forward almost have to be much higher than after a big run-up. So in that sort of environment the projected return of the investment portfolio could potentially be much higher than the 8% social security bump.
When to Take Social Security Summary
In this post, we covered two very important factors to consider when determining when to take social security. If you are looking for guidance with your retirement planning, don’t hesitate to reach out to our team for assistance.
