Review & Outlook

Our take on the investing, financial, & economic themes of the day

When Should You Take Your Social Security Benefits?

4 September, 2014 by Sally Sulcove, CFA, CFP in Commentary

The question of when to take Social Security benefits does not have a clear, generic answer.  The big unknowable, of course, is longevity.  Unlike IRA or 401(k) assets, Social Security benefits aren’t inheritable beyond one’s surviving spouse.  Even though you may pay social security taxes for decades, you can only collect benefits from the point you retire until death.  After your death, a portion of your Social Security benefits may be available to your spouse.  If there’s a difference between the amount you paid in to Social Security during your working career, and the amount you and your spouse draw out, then the federal government keeps the difference.

For a single individual, the answer is clearer:  It almost always best to work as long as feasible to delay withdrawals from retirement savings and taking Social Security benefits.

Married couples have an interesting alternative.  The spouse with the lower income can take early retirement (for most clients considering this option, that age will be 62, but the age may vary).  The spouse with the higher income could continue to work until 66 and then take just spousal benefits until qualifying for the highest personal benefit (usually age 70), and then switch to personal social security benefits.  In theory and based on numerous assumptions, this allows the couple to reduce personal savings withdrawals before age 70, while obtaining roughly the same lifetime Social Security benefits as those couples electing to retire at the maximum Social Security retirement age.

The advantages of this strategy were highlighted recently in a T.Rowe Price study, which is nicely summarized in the following Wall Street Journal article, “How to Time Social Security: It doesn’t always pay to wait to collect until age 70.”  One consideration raised in the study that is often overlooked:  drawing down retirement savings while waiting for Social Security has its disadvantages, too, not only in terms of money withdrawn, but also in terms of the investment return that could have been achieved on that money, especially in an IRA where growth is tax-deferred.  The impact of this consideration depends largely on two factors:  (1) market conditions and (2) the longevity of each of the spouses.

There are a number of online Social Security benefit calculators, but for most people, the answer may simply come down to a matter of need.  If income is sufficient from other sources, then it’s probably best to hold off on Social Security benefits.  Inflation protection and stability give Social Security benefits a unique quality as part of the retirement income mix, which is something worth maximizing if possible.