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Make Your Portfolio Last Longer: Delay Social Security Benefits

There is a new study that illustrates how Social Security claiming decisions impacts the longevity of a financial portfolio. As many of our clients know, I have been preaching the benefits of delayed Social Security benefits.  This study reaches two important conclusions:

First, the decision to delay Social Security benefits can increase the longevity of the portfolio by as much as 10 or more years. The authors conclude that the greatest benefit is derived from those with portfolios of less than $1,000,000. (There is still a benefit of delay for those with larger portfolios it just that the impact is not quite as strong at higher levels of wealth.)

An important takeaway is for those who claim that they ‘cannot afford’ to delay their benefit. The authors held real spending constant and have shown that the delay is greatest for those with lower levels of wealth. I would argue that they cannot afford to claim benefits early!

The second important conclusion is that retirees can actual increase their real annual spending by delaying Social Security. If one recognizes that the decision to delay increases total expected lifetime benefits, it would seem to reason that one could spend more. Another aspect of this has to do with how Social Security benefits are taxed. If one is drawing down their retirement assets while they delay, they will need less of these assets starting at age 70 since they will be receiving a much larger benefit. For many folks, much of their Social Security will not be taxed with these lower required distributions from their financial portfolio.

Furthermore, the authors assume that the investor is drawing down funds from a pre-tax account (401k or IRA). What if the investor has assets in a non-retirement account that could be tapped while they delay? Since these assets are likely to be taxed at a much lower rate (capital gains for example), there are many strategies that could have other benefits such as converting IRA assets to Roth assets which would further lower required minimum distributions at age 70.5.

Finally, what about those who worry that Social Security is going broke? While I do agree that changes will have to be made to the system in the long-term, there is a very low likelihood that any changes will impact those over age 55. My best guess is that anyone over age 50 will not be materially impacted by any changes. And, as the authors point out, it is unlikely that any of these changes are going to be beneficial to those who decide to claim early. If the decision is made to push back normal retirement to age 68 or later, this will almost certainly have a detrimental impact on those seeking to claim early.

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