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John Manganaro

Retirement Planning > Social Security > Claiming Strategies

Surprise! It Doesn’t Always Pay to Delay Social Security Till 70

By John Manganaro

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This is the third in a new series of columns about Social Security and retirement income planning.

Last week, ThinkAdvisor published the second in a series of case studies meant to help educate advisors and their clients about the nuances of Social Security claiming. The result — in which delayed claiming of benefits did not yield the biggest total lifetime payouts — seems to have surprised some readers.

The case involved a married couple, Bruce and Debbie, of nearly the same age (born in 1962) but with very different work histories. Specifically, Bruce is a high lifetime earner, while Debbie did not earn enough credits to be eligible for Social Security benefits from her own work record.

Both spouses have a full retirement age of 67, but given the particulars of their situation, Debbie cannot begin collecting spousal benefits until Bruce files his own application — and that’s a very important fact in the final analysis. Also, if Bruce takes benefits before his full retirement age, he will not only reduce his own benefit but also the widow’s benefit payable to Debbie if she survives him.

What seemed to confuse some readers, as encapsulated by a question shared with me by one Rick S., was that the optimal claiming strategy does not require either Bruce or Debbie to delay claiming until age 70. After all, doesn’t the conventional wisdom say that delayed claiming is always superior?

As this and other future case studies will show, rules of thumb are helpful for kick-starting broader conversations and teaching key income planning concepts, but every particular case has its own peculiarities and considerations. This is why advice on Social Security claiming is both in high demand and highly valuable for clients — though it is also, unfortunately, very scarce for middle-class and lower-income Americans who have the most at stake in getting claiming right.

When Rules of Thumb Fall Short

“I had a question about your article on Feb. 9 regarding the case of a high-earning husband,” Rick wrote in. “It gives the scenario of both of them waiting until age 70 to file, but I have been told and read elsewhere that a spousal benefit does not continue to grow after they hit full retirement age. … Because her amount wouldn’t go up after she reached age 67, what would be the benefit for the spouse to wait until age 70?”

The scenario in question involves Bruce and Debbie relying on outside funds early in retirement and delaying claiming until Bruce can get his maximum worker’s benefit. Specifically, if Bruce waits until late 2032 to file for his maximum benefit at age 70, he would get a monthly payment of $2,854.

Debbie could then file at the same time for her full spousal benefit of $1,151, and she would become entitled to a maximum $2,854 survivor benefit for two years, based on the couple’s life expectancies. With this approach, the couple would generate a collective lifetime total benefit of $773,423, with $516,574 paid to Bruce and $256,849 paid to Debbie.

While this delayed claiming strategy is projected to be superior to two early claiming scenarios reviewed in the case study, Rick is correct that it is not the optimal strategy. According to the case study, the optimum claiming strategy would actually involve Bruce filing at age 67 in late 2029 for his full worker benefit of $2,302. Debbie could file at the same time for her full spousal benefit of $1,151, and she would eventually become eligible for a full survivor benefit of $2,302.

Though their monthly checks would be smaller, this approach would result in $788,435 in total lifetime benefits going to the couple, with $499,534 paid to Bruce and $288,901 going to Debbie — adding a projected $15,000 to the age-70 claiming total.

So, Rick is correct, and it is important to understand why: Debbie waiting until 70 to claim her spousal benefit (as she would have to do if Bruce waited until age 70 to claim his worker benefit) doesn’t really benefit the couple overall. As the case study pointed out, it does help the couple to delay until the full retirement age at 67, but Bruce and Debbie should absolutely claim at that point.

The big takeaway is that the nuances of when one can claim spousal benefits in cases where there are big differences in earnings histories can make waiting until age 70 to claim a sub-optimal strategy. Yes, it’s going to be better than claiming a significantly reduced benefit at age 62, but the earlier collection of the full benefits will pay off in the end.

When Delaying Does Make Sense

With that said, it is still important to highlight the virtues of delayed claiming, as this is often the optimal claiming pathway for many singles and married couples. For example, the first claiming case study we published earlier this year involves an optimal age-70 claiming strategy — though that scenario also includes significant complexity of its own.

An analysis published last year in the Journal of Financial Planning by Wade Pfau and Steve Parrish details the basic mechanics behind delayed claiming. In the analysis, Pfau and Parrish use real historical return data to directly tackle the question of whether claiming benefits at age 62 leads to greater wealth at death compared to delaying Social Security benefits until age 67 or 70.

In crunching the numbers, the researchers find that delaying Social Security typically leads to higher amounts of wealth at death than claiming it at age 62, even for the wealthy, thereby refuting the claim that it is a good idea for more affluent people to start Social Security benefits early just to keep more dollars invested in the market.

According to the analysis, one key variable in the outcome of any given scenario being tested is the assumed allocation to stocks. Specifically, the early claiming strategy tended to fare better with higher stock allocations. Similarly and as expected, the results of the market-based approach are superior when stock market returns are strongest in the years between when the individual turned 62 and 70.

And, as the Social Security guru Marcia Mantell recently told me, another important consideration is that the delaying of benefits functions almost like a hedge against the potential for future benefit cuts that could result from Social Security’s shaky financial position. In Mantell’s substantial experience, it is common to hear investors speaking about Social Security “going bankrupt,” and they think claiming early therefore makes more sense. 

The reality is that those who fear big benefit cuts have an even greater incentive to delay claiming (assuming that’s the optimal approach), as such future cuts will be made to a higher monthly benefit. 

John Manganaro

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