When you wait longer to draw your Social Security benefit, the benefit increases. What's not to like about that? Waiting may be your best option, but it depends.
Who wouldn't want to receive an increased lifetime benefit? But even that decision requires a thorough evaluation of several factors, including your health and family health history and financial and family considerations.
Our last article outlined three reasons why claiming early might make sense for you. So now we're going to look at it from the other perspective and show you three reasons why it may make sense to delay your Social Security benefits to age 70:
You're in Great Health
If you are in excellent health and your family's health history is one of longevity, you might expect to live for a long time. So, conceivably, you could draw down the maximum benefit based on your life expectancy and possibly more because your benefits are guaranteed for life. Living longer means you should wait for the highest possible payment.
You Don't Need the Money
Suppose you have done well with your retirement planning and have accumulated sufficient capital from which to draw your income when starting retirement. In that case, delaying Social Security to lock in the maximum benefit could make sense.
If your portfolio is structured as buckets, with the first bucket filled with sufficient, safe, liquid cash or cash equivalents, you can draw that down to allow your Social Security benefit to grow. It would also allow your second and third buckets filled with intermediate to long-term investment assets to grow and avoid drawing them down in a market downturn.
You Want to Use Social Security as a Portfolio Hedge
Less appreciated, and therefore often ignored as a critical planning issue, is the value of Social Security as a retirement asset and its impact on other assets in a retirement portfolio. The fact is, Social Security payments are significant enough that, for the average beneficiary, it would require an asset worth several hundred thousand dollars to replace it. For most people, that would comprise a significant portion of their total net worth.
However, unlike other assets, the unique investment characteristics of Social Security make it a highly desirable asset, capable of providing a hedge against many of the risks associated with retirement portfolios. Because the value of Social Security benefits increases are guaranteed, it is considered a hedge against the rest of the retirement portfolio.
Also, because the value of Social Security is calculated based on life expectancy, its value increases further for people who live beyond life expectancy. And, because its payments are inflation-adjusted, its value increases even further during periods of higher inflation.
Incorporating Social Security into Portfolio and Income Planning Decisions
You should plan your retirement income strategy well ahead of your retirement date. There are numerous factors to consider that can impact portfolio decisions before and after retirement. With hundreds of thousands of dollars at stake, your claiming decision is an important part of your retirement income strategy.
Here is a summary of the key considerations for when to delay your Social Security benefits:
- You're in good health and expect to live past the standard life expectancy.
- You don't need the money and can use other assets while your benefits grow.
- You want to take advantage of guaranteed income growth as a portfolio hedge.
Social Security is a crucial piece of the retirement puzzle. Contact your advisor to get a plan in place that's right for you.