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When to Claim Social Security  

Questioning the Conventional Wisdom

Many of the articles I read regarding social security ultimately seem to recommend waiting to claim benefits at least until full retirement age, which is 66 or 67, depending on when you were born. At first, the logic seems like a no brainer: wait longer so you can receive a higher monthly paycheck for the rest of your life. As long as you live long enough, you win. Cool, right? Not so fast.

These articles also fail to consider the rest of the financial picture. There is an opportunity cost to claiming later benefits. What are you really giving up? If a retiree waits to claim social security, he or she either has to take withdrawals from their portfolio earlier or they are passing up on the opportunity to add to their portfolio using their social security paycheck.

For somebody born between 1943-1954, by claiming at 62 he or she will be getting 25% less than they would if they had waited to claim at 66. The question is: How long would they have to live in order to benefit from postponing their benefits?

Lets say a retiree follows the conventional wisdom and waits until 66 to claim and will be getting $2,000 instead the $1,500 they would get at 62 (25% less, as noted above). Lets also say that this person makes an average of 6% per year in their portfolio. He or she would have to live past 92 years of age to benefit from postponing social security until 66. If they made an average of 7%, they would have to live past 104! This is what happens when we look at the potential opportunity cost of missing out on 4 years of $1,500 per month in a portfolio invested for long-term growth.

Additionally, social security benefits are normally taxed at a lower rate than withdrawals from an IRA. Normally, withdrawals from an IRA are 100% taxable while only a maximum of 85% of your social security benefits are subject to federal income tax. You should discuss social security tax implications with your CPA before you make a claiming decision.

This is not meant to be an all-inclusive broad based recommendation for everybody to claim social security as soon as humanly possible. The point is that every financial decision should be made in the context of the full financial picture for that individual. There are of course scenarios where waiting to claim later benefits is absolutely the best option. Again, it depends on the individual and his or her specific financial situation.

You should discuss your options with a trusted advisor. Everybody’s situation is different and optimizing your social security benefits may not be as easy as it appears. I am happy to sit down with anybody who has questions regarding their options in the context of their overall financial plan. Together we will consider your financial picture and find the best fit for your situation.