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Ask Bob: Does it Make Sense to Delay Social Security When You're at the Maximum Benefit?

If you've reached full retirement age, and the maximum Social Security benefit, does it make sense to delay starting benefits to age 70? Financial adviser Wendy Marsden walks our reader through the pros and cons.

Question

Can you envision any scenario where it makes sense to delay starting Social Security (FRA - full retirement age) when you are at the maximum benefit and expect to also claim the spousal benefit for a non-working spouse? Yes, the survivor benefit could be higher but the loss of 150% of the FRA payments for the deferral period, with interest, would more than compensate for that, unless I’m missing something. Born in 1954, spouse in 1953.

Answer

This comes down to a matter of longevity, says Wendy Marsden, CPA, CFP®, at ProsperiTea Planning. “If you aren't able to do the old file and suspend trick (and you won't be at your age) then you're correct that you're giving up quite a lot of income for the three year deferral period: probably around $250,000 in your case.”

Marsden suggests considering three ages: the age you'd guess you're likely to die, an age you fear you might live to, and an age you fear you'd only get to. “If you expect one - or maybe both - of you to live well into your nineties,” she says, “I'd look twice at delaying the Social Security application.” The exact crossover age is determinable with software used by financial planners but the exact mathematically correct answer is NOT determinable in advance.

Consider also the issue of "minimization of regret." “If you both keel over at age 73, you clearly chose wrong by waiting to 70 to claim,” Marsden notes. “But you don't care, you're dead. However, if either of you lives to 95, you would regret every month for the rest of your life that you didn't get the higher payout.”

Another issue concerns your base-level income needs in retirement, notes Marsden. Is the FRA Social Security benefit enough to cover your base needs, or do you need to go buy a pension and/or build a bond ladder to get the fixed amount coming in every month up to the necessary level? “If you were going to go buy a $250,000 single premium immediate annuity, I'd skip that and just delay the Social Security benefit instead,” recommends Marsden. “The Social Security benefit will (probably) give you a better payout, and it's both indexed for inflation (slightly) as well as backed by the full faith and credit of the United States. So if you look at it that way, the question becomes how likely are you to wish for increased base-level income via the purchase of annuities? If you'd have plugged the gap with anything, plug it with Social Security, when you have that option.”

“I know people think they'll grab the $250,000 and go invest it, but I'd be wary of believing you'll actually do this if you don't have an investment advisor helping you with your asset allocation investment policy as well as your distribution policy,” she says. “Sadly, many seniors over-state their abilities to invest it, and sharks are circling trying to defraud you of your pile of money,” explains Marsden, adding that most people are happier with a fixed income rather than a pile of cash to invest.

“The next thing to mention is that it's a good idea to run down the balances of your tax-deferred money before you start Social Security,” she says. This will reduce your eventual required minimum distributions (RMDs) and help you to stay under IRMAA thresholds (where higher income seniors pay more for their Medicare). Social Security itself isn't taxed unless there's other income. “If you do Roth conversions and/or distribute (and pay the taxes) on a substantial portion of the IRA before you reach age 70 and start social security,” she notes, “you may find that your overall tax bill is lower.” Consult with a tax-focused financial adviser like the members of the Alliance of Comprehensive Planners for more help with tax bracket management.

One last thing. “If you do decide to start Social Security at age 66, look into Qualified Longevity Annuity Contracts, commonly called QLACs,” says Marsden. These can help by both reducing the RMD at 70 as well as giving you some longevity insurance to reduce that regret when you're 95.

Got questions? Get answers!

Email Robert.Powell@maven.io

Question

Can you envision any scenario where it makes sense to delay starting Social Security (FRA - full retirement age) when you are at the maximum benefit and expect to also claim the spousal benefit for a non-working spouse? Yes, the survivor benefit could be higher but the loss of 150% of the FRA payments for the deferral period, with interest, would more than compensate for that, unless I’m missing something. Born in 1954, spouse in 1953.

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