How prioritizing Social Security timing can provide a stronger retirement

Waiting to claim Social Security can mean more lifetime income and a stronger portfolio, helping you worry less about running out of money and feel more confident about the future.

“Delay taking Social Security” is standard advice in the financial planning world and a strategy that is baked in to many tools and planning models. But while that guidance is backed by good data, it’s not necessarily easy to understand and act on.

What makes delaying Social Security such a valuable strategy? The answer lies in the way that the strategy reduces the chance of running out of money at an advanced age, when you are likely to need more financial resources, not fewer. And, interestingly, the average retiree is more likely to face a higher level of longevity risk.

Retirees are often interested in claiming Social Security benefits early on. In theory, doing so provides a stable source of income during a time of transition, and it preserves personal retirement savings in the short term, which some may be reluctant to let go of.

Of course, there are circumstances where it does make sense to take benefits right away. In a married couple, for example, the person with the smaller benefit may want to start their payments as early as possible. But our data suggest that delaying the start of Social Security benefits offers critical benefits.

A long life can be very risky to your financial health. At age 62, the average life expectancy for a man is 81; for women, it’s 84. But on average, wealthier individuals tend to live longer than the general population, largely due to differences in wealth, education, and health.

Longevity risk is an imbalanced risk. Just as the consequences of arriving 10 minutes too late for a flight are far worse than arriving 10 minutes too early, the financial outcomes for those who live a long time can be worse than for those who pass away earlier than expected. Social Security benefits are guaranteed to last as long as you do. So, maximizing the value of those benefits is a powerful way to forestall the risk of outliving your assets.

Delaying claiming your Social Security benefits offers two critical advantages to those who outlive life expectancy: higher lifelong payouts and better preservation of your personal portfolio’s long-term value.

T. Rowe Price ran a hypothetical investor scenario to illustrate how these advantages might play out. (Note that this analysis applies to someone who never married, not necessarily to a divorcee, married couple, or widow/widower.)

The Ray example

Consider Ray, a hypothetical preretiree attempting to coordinate his Social Security benefits with $1,000,000 in personal retirement savings. Ray is planning to retire the month he turns 62. He wants a retirement income of $5,000 per month, and he expects to live until age 90.

Ray’s assumptions:

Figure 1 estimates Ray’s outcomes if he initiated Social Security benefits at age 62, age 67, and age 70. The findings are striking. Notice, for example, that if Ray takes his benefits at age 70, he will end up receiving significantly higher Social Security payouts over his lifetime by the time he reaches age 90.

This is because Social Security provides the maximum benefit to those who claim at age 70; any claims prior to that are at a reduced rate. So, for every year you delay claiming benefits beyond the earliest eligibility age of 62, you receive a higher monthly benefit. In Ray’s case, even though waiting to take Social Security until age 70 would mean he gets the benefit for eight fewer years, he would still receive much more in Social Security benefits. And the higher benefit he receives results in smaller withdrawals from savings, which means a higher total portfolio balance at age 90. We’ll explore this example and portfolio preservation in more detail in the next section.

The Ray example also shows something that may be counterintuitive: Delaying Social Security can help maintain your personal retirement portfolio value for a longer period.

When you postpone taking Social Security, you may initially rely more heavily on your investment portfolios to meet income needs. However, once Social Security benefits kick in at age 70, the increased value of those benefits significantly reduces the size of withdrawals needed from your retirement portfolio. By reducing annual drawdown amounts, the retirement portfolio can last longer.

In Figure 2, Ray’s portfolio estimates for claiming benefits at age 62 are compared with those if he waits until age 70. The individual delaying Social Security achieves a higher portfolio balance later in life when longevity is more of a concern. The reduction in retirement savings drawdown starting at age 70 means the portfolio can hold more of its value, support legacy planning, and help to meet unexpected financial needs over his remaining life span.

While claiming Social Security at age 70 may seem less rewarding at first, the portfolio value surpasses early claiming at age 62 around age 81—making it a smart strategy for those anticipating a longer retirement.

Again, this advantage only kicks in for those who live a long life—it takes until about age 81 before the portfolio value of the age 70 scenario outpaces the value of the individual who takes their benefits at age 62, as illustrated in Figure 2. And many people already wait until beyond age 62 to take their benefits. But for the typical individual, living longer than 20 years in retirement is not an uncommon outcome.

The implications of these data are profound. Each year you delay beginning benefits from age 62 to age 70, you will receive additional guaranteed income every month of every year for the rest of your life. These higher payments alone act as a robust hedge against longevity risk since it means more income when/if you live beyond average life expectancy.

Delaying benefits can also extend the life of your personal retirement portfolios. Higher health care costs and potential long-term care costs are more likely to occur, and at higher expenses, later in life. A higher Social Security payment and a higher portfolio value are two excellent strategies to hedge against these and avoid facing difficult financial choices.

When you model the alternatives, delaying Social Security is a best practice that can benefit a majority of retirees. The benefits of doing so are significant, even if you must draw down their retirement savings for multiple years prior to age 70. Higher Social Security income and a greater sustainability for your retirement portfolios is a powerful combination. Put together, these two advantages can dramatically minimize fears about longevity risk.