The Social Security Age Gamble: Claim Now or Wait?

Adviser Keith Whitcomb talks about how to calculate when you should claim your Social Security benefits to get the most money.
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By Keith Whitcomb

According to many financial advisers, people would be better off waiting until their 70 to start claiming Social Security, than if they take benefits in their 60s. The logic behind this advice is driven by the typically cited 8% government-guaranteed increase in lifetime payments for each year they delay, up to age 70. That sounds like a no-brainer, but what's missing from this analysis is the probability of the payoff.

I'm not talking about Social Security running out of money to fully fund benefits, although there's speculation about that, too. Rather, I mean the likelihood people will live long enough to benefit from the increased payments that start later in life.

From an actuarial standpoint, Social Security isn't designed to reward the patient. It's designed to compensate everyone equally, regardless of when benefit payments begin. So, does it even matter when you begin taking Social Security? Let's look at some factors that will impact your decision on when to start.

Betting Against the House

Are you the type of person who goes to the track and bets on the long shot because the payoff will be huge if your horse wins? Well, if that isn't you, then betting that you will out-live an actuarially based mortality estimate may not make sense, either. When you decide to delay Social Security, you are essentially making this bet.

Online Social Security benefit calculators designed to help you make the timing choice tend to leave the age of death assumption up to you. While these calculators are good at describing the payoffs, the maximization of total benefits ends up being driven by your mortality estimate. This type of analysis just doesn't go far enough, as illustrated by a research paper titled Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA). The study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age, and provides that analysis over a range of discount rates. A general conclusion of the study is that you shouldn't wait to reach the age of 70 to initiate your Social Security benefits.

Beating the House

Betting against averages that are based on the laws of large numbers is often a losing proposition. The exception is when the deck of cards is stacked in your favor. If you have insider information on personal characteristics that differentiate you from the assumptions used to calculate Social Security benefits, you may be able to beat the odds.

See if any of the following circumstances fit your profile:

Chronic conditions: A Johns Hopkins study found that nearly 80% of Medicare beneficiaries have at least two chronic conditions, and more than 33% have at least five. It has also been estimated that each chronic condition can reduce your life expectancy by between 0.4 and 2.6 years. Impact: The more chronic conditions you have, the more advantageous it becomes to take Social Security early.

Biological age: Research on the difference between chronological and biological age has started to impact the retirement planning process. While the science of measuring biological age is still evolving, it may become a significant factor when determining your Social Security timing in the near future. Impact: A life span swing of plus or minus 10 or 15 years, which may become common, will need to be incorporated into your decision on whether to take Social Security early or late.

Gender: Social Security benefits are based on earnings history and ignore gender. At age 65, women on average live 2.5 years longer than men. Impact: There is a slight bias for women to delay Social Security and for men to take it early.

Income: Studies have shown that income has a positive effect on longevity. The more you make, the longer you live. One study shows an approximate midpoint at $60,000 with about a plus or minus three to five-year swing in mortality as income increases and decreases around that amount. Impact: It's beneficial to take Social Security late for high income earners and early for low income earners.

Discount rate: What is the expected rate of return on your portfolio? Lower rates of return favor taking Social Security at an earlier age. Impact: According to the previously mentioned SSA study, for individuals born in 1952, the Maximized Claiming Age (MCA) is never 70 at a return assumption greater than 5.9%. MCA is always 62 at a return assumption greater than 7.5%.

Beyond Betting

While many Social Security benefit strategies died in 2016 when President Obama and Congress closed the file/suspend/restrict claims loophole, there continues to be a need to plan beyond a singular focus on maximizing an individual's benefits (e.g., spousal survivor benefits).

This choice is not just another buy/sell investment decision driven by the optimization of total return. It is important to understand the insurance/annuity characteristics of Social Security. It needs to be first viewed as a foundational retirement income source that is protected from inflation and mortality risks. After those structural qualities are appreciated and integrated within the planning process, an evaluation can be further refined by looking into optimizing payments.

The Good News

It turns out you may not have to wait until age 70 to start receiving the benefits you have accrued over a lifetime of paying FICA taxes. However, before you start drawing on Social Security at age 62 because you have determined it maximizes your total payments, you need to balance the timing of those benefits with the rest of your retirement income plans. This choice, which isn't reversible after 12 months, needs to be driven by more than just a desire to make more money based on your knowledge of the game. However, it's also nice to know how to play the cards when you've been dealt a winning hand.

About the author: Keith Whitcomb MBA, RMA, is the director of analytics at Perspective Partners and has more than 20 years of institutional investment experience.