While the monthly social security check may not be crucial for our clients, it is a fact of life at a certain age – so shouldn’t we do our best to try to optimize that decision? When most people think about Social Security, they tend to think about it as a benefit that arrives each month, ideally on time, and will for the rest of their life. For many retirees, it is viewed as a fixed entitlement: something you paid into throughout your working years and eventually begin collecting somewhere between age 62 and 70.
From a planning perspective, however, Social Security is far more than a monthly benefit. It is actually a retirement asset (a government-backed, inflation-adjusted income stream designed to last for life.) For married couples, it may last for two lifetimes. And unlike many assets on a balance sheet, Social Security is not subject to market volatility, credit risk, reinvestment risk, or the emotional temptation to sell at precisely the wrong time.
Despite that, the decision surrounding when and how to claim Social Security is often approached with surprisingly little analysis. Many individuals claim before full retirement age simply because that gets income coming in the door sooner rather than later. Claiming earlier may be reasonable for individuals with shorter life expectancy, immediate income needs, limited portfolio assets, employment considerations, or family circumstances. Others delay because they are focused on maximizing the total monthly cash flow once their Social Security payments start, or, because they have heard that “waiting is always better”. Still others rely on a friend, social media post, or a well-meaning neighbor at the club who claims to have “figured out the system.” All of the above are reasons… but I think we should dig a little deeper.
Also, one brief disclaimer: you really don’t know whether or not you have optimized social security until you are deceased (and, if married, your spouse is deceased) so when I talk about “optimizing”, I really mean, attempt to optimize. Nevertheless, the reality is that optimizing Social Security is not about identifying a universally ideal claiming age. It is about integrating Social Security into the broader architecture of a retirement income plan – one that considers longevity, taxes, portfolio withdrawals, spousal dynamics, healthcare costs, and the long-term sustainability of income.
One of the most powerful features of Social Security might be the economic value created by delaying benefits. If an individual claims before full retirement age, benefits are permanently reduced. Claiming at age 62, for example, can reduce benefits by as much as approximately 30% relative to the benefit available at full retirement age.(1) Conversely, for each year benefits are delayed beyond full retirement age, benefits increase through delayed retirement credits until age 70.(2) In practical terms:
Claiming at age 62, while starting the payments sooner (i.e. money in your account sooner), can reduce benefits by approximately 30%.(1)
Waiting beyond full retirement age increases benefits by roughly 8% per year (under the current system).(2)
Delayed retirement credits stop accumulating at age 70.(2)
Future cost-of-living adjustments are applied to the larger benefit base.
That last point often gets overlooked. Delaying does not simply create a larger check in year 1. Delaying the start of social security creates a larger inflation-adjusted check for the rest of your life. The compounding effect can be significant over a retirement that may span 25 or 30 years. And that brings us to longevity (which, whether we like it or not, tends to be central to this conversation.) Social Security is not really designed to maximize income in your early retirement years. In many ways, it functions as longevity insurance. It is there not simply for age 65, but for age 85, age 90, and in many cases beyond. For healthy married couples in their mid-to-late 60s, the probability that at least one spouse lives into their 90s is not merely possible… it’s probable.(4) This matters because the Social Security decision should not be seen as a near term income decision. It may be a thirty-year income decision. When viewed through that lens, maximizing reliable, inflation-adjusted income becomes less about “getting your money back” and more about protecting purchasing power over a potentially long retirement.
For some married couples, the analysis has another wrinkle. The claiming decision of one spouse affects not only current household income, but potentially survivor income decades later. While a spouse may be eligible for benefits worth up to 50% of the higher earner’s full retirement age benefit,(3) delayed retirement credits can also increase the survivor benefit received by the surviving spouse. In many households, this means the higher earner delaying until age 70 is not merely a decision about maximizing income today – it may be one of the most effective ways to create a larger income floor for whichever spouse lives longest.
Interestingly, when Social Security is viewed through an income-planning lens, it begins to resemble something familiar in the financial world: an annuity. That comparison is worth exploring. At a high level, both Social Security and lifetime annuities are designed to accomplish something similar. They convert a stream of resources into reliable lifetime income. For some situations, this income can help manage longevity risk. Reliable lifetime income can reduce pressure on a portfolio during market downturns. And, guaranteed income can create psychological comfort by ensuring that certain expenses are covered regardless of what markets happen to be doing.
But that is where the similarities begin to fade. In order to purchase a traditional income annuity, an investor generally has to transfer a meaningful amount of capital to an insurance company. That capital is typically no longer yours at all – depending on the product structure, liquidity, death benefits, surrender charges, fees, and access to principal may vary significantly. It is no longer available for opportunistic investing, gifting, emergencies, or legacy planning. In many cases, access to principal is significantly reduced (or eliminated altogether) in exchange for the annuitized income. And, at least when compared to an annuity, those same funds invested OUTSIDE of annuity can provide income – and you keep the money!
Social Security, by contrast, requires no such capital transfer at retirement. There is no check to write. No portfolio liquidation. No surrender of liquidity. No underwriting process. No commissions. No mortality and expense charges. No contractual riders with footnotes requiring explanation or expertise to fully understand. And perhaps most importantly, there is no direct tradeoff between claiming Social Security later and permanently handing over investable assets.
To appreciate just how economically powerful that can be, consider the income purchasing power involved:
Increasing Social Security benefits through delay may create the equivalent of purchasing a substantially larger lifetime income stream.
Replicating that same inflation-adjusted income through a private annuity often requires committing a significant amount of after-tax capital.
Delaying Social Security can enhance guaranteed income without reducing portfolio liquidity.
In many cases, delaying Social Security can provide a favorable implied return compared to the cost of generating similar income from other sources.
This does not mean annuities are inherently bad. In the right circumstances, for the right investor, with the right structure, annuities can play a meaningful role. But it does mean that many retirees overlook the fact that they may already own a valuable, reliable source of lifetime retirement income… without ever signing an insurance contract.
(Compliance Disclaimer: Any discussion or evaluation of annuities should be based on the specific annuity contract, client objectives, fees, tax treatment, and income need.)
And that brings us to taxes, which, as usual, refuse to stay out of the conversation (pesky taxes). The age at which Social Security is claimed can materially influence required withdrawals from retirement accounts, Roth conversion opportunities, Medicare premium surcharges (looking at you IRMAA), the taxation of benefits, and overall lifetime tax efficiency. In some cases, intentionally delaying Social Security while strategically drawing from taxable or tax-deferred accounts can create attractive tax-planning opportunities during the early years of retirement. In other cases, claiming earlier may make sense because of health concerns, income needs, employment situation, etc.
Which brings us to the uncomfortable (if honest) conclusion. Maybe the question should not be, “when should I start claiming social security?” but rather “how does Social Security fit into the broader architecture of my retirement plan?” Because Social Security is not simply a government benefit. It is not merely a monthly deposit. And it is certainly not a decision that should be made because a neighbor, a headline, or a television commentator says “everyone should wait” or “take it while you can”. Social Security may be one of the most efficient, inflation-adjusted income assets you will ever own. The challenge is not getting access to it. The challenge is making sure you think about and plan for it… and then enjoy the fruits of that planning!
