Q: I am 68 and my wife is 65. We’re both retired but my pension doesn’t cover our monthly expenses. I haven’t taken Social Security yet. But I have some health issues. I have substantial savings, growing at 2% to 3% a year. Does it make more sense to take Social Security now or withdraw from my savings and let Social Security benefits grow for two more years? – Jeff Rainer
A: It depends on how serious your health issues are. But there are other important factors to consider too, says Thomas Mingone, a managing partner at Capital Management Group in New York.
It often makes sense to wait as long as you can to take Social Security. Payments increase 8% a year each year you delay until age 70. That kind of return is difficult to get with your investments. And, as people live longer on average, it’s hard to beat a steady stream of income that will grow inflation-adjusted for the rest of your life.
That said, if you did wait another two years to claim, you’d be among a very small group of people who do so. Nearly half of men and 42% of women take Social Security at 62, the earliest possible age you can claim, according to the Center for Retirement Research. Just one-third of men and 27% of women wait till full retirement age, which, like you, is 66 for most people today. Only 4% of men and 2% of women wait till age 70, according to CRR.
Why are people reluctant to wait? Some simply can't afford to. Others worry they could leave money on the table if they don’t live long enough for the larger payments in the future to pay off, exceeding what people think of as a break-even point. That concern, however, should be weighed against the fact that waiting essentially provides insurance—most of us don't know exactly how long we'll live, and the extra payments will make it easier to make your money last if you live longer than you expect.
But new research shows why waiting as long as possible doesn’t make sense for everyone, even people who have enough assets to wait.
A Stanford University research team studied older Americans who had claimed benefits early, even though they had enough money set aside to delay claiming for two or more years. Many people in the group that claimed early had worse self-reported health, expected not to live longer than average and indeed, turned out to die earlier.
“If you’re falling short of money and your health issues are so serious you don’t think you’ll reach average life expectancy, it makes sense to take it,” says Mingone. Taking it now will also allow you to preserve your portfolio and provide funds in case you need it for large medical expenses down the road.
If you do start tapping your portfolio, you’ll trigger income taxes, which will add another expense. Your portfolio is growing at a modest 2% to 3% a year, which suggests it is invested very conservatively. By waiting to draw on it, it can continue to grow. You could consider investing it a bit more aggressively, says Mingone. “If you can wait five or ten years to touch that money, then you can put a little more money into equity markets,” he says. How much you should have in stocks depends on your risk tolerance.
There are other strategies to consider, says Mingone.
You could file for your Social Security benefits and then suspend the payments till you reach 70. That would allow your wife to collect the spousal benefit in the meantime. Even if it’s not enough to fully cover your shortfall, you won’t have to take as much from your portfolio to cover the gap in your income.
However, you also have to consider how important maxing out your Social Security benefit will be to your wife. Women statistically live longer than men. The average life expectancy for a 65-year-old man today is 84.3 years. For a woman who is 65, it’s 86.6 years, according to the Social Security Administration. Those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. Even though the average length of widowhood ranges from ten to twelve years, there is a considerable chance of the widow surviving their spouse by twenty or more years. By delaying from 66 to 68, you boosted your monthly benefit by 22%. Wait till 70, it will increase another 13% according to Stanford research.
A Social Security calculator like the one available online at Financial Engines will run thousands of scenarios to help you identify the best choices. Mingone also suggests talking with a financial adviser to analyze your specific situation. “There are a lot of pieces to this puzzle but there is no right or wrong answer,” says Mingone. “When to take Social Security is one of the most important financial decisions you will make in your life but it is also a very personal one too.”