When Is the 'Right' Time to File for Social Security Benefits?

Many consumers have heard the advice to delay claiming Social Security until later in life--past age 62 and perhaps up until age 70--with the goal of claiming a higher lifetime benefit.

But is delaying Social Security always advisable? Not necessarily. In a recent episode of The Long View podcast, author Mike Piper shared instances when claiming earlier is advisable, as well as when claiming benefits later makes sense. He also discussed the free tool he created to help with Social Security claiming decisions, Open Social Security. Piper writes the popular Oblivious Investor blog, and he is also the author of several books about Social Security, taxes, and retirement, including Can I Retire?, Social Security Made Simple, Investing Made Simple, and Taxes Made Simple.

Christine Benz: People may have heard you pick up an 8% benefits increase for each year you delay past full retirement age. Why do you think that's the wrong way to frame it as some sort of a return pickup--and even just plain wrong that you get that 8% return increase? How can people quantify the benefit enhancement they get from delaying?

Mike Piper: The reason it's not a return is because in order to calculate a rate of return we need to know how long you're going to be receiving the series of cash flows in question. And if you think of an easy example, imagine somebody who decides to wait until age 70. So, if they don't file for benefits and then they die at age 69. Well, they obviously didn't get an 8% return. They got a negative return, because they never collected any cash flows. They gave up cash flows. So, it's clearly not a positive return at all. We can calculate expected rates of return given various mortality assumptions, or in hindsight, we can calculate what a person's rate of return would have been once we know how long they ended up living. But the only way for it to be an 8% rate of return would be if you lived forever. Then it would be an 8% rate of return.

Jeff Ptak: What are some situations when it makes sense to claim sooner rather than delay?

Piper: The most obvious one is a single person who is in very poor health. If you're 62 and you have a particular diagnosis that says that you're unlikely to live until age 70. Well, you probably don't want to wait until age 70 to file for benefits.

Another very common example is just that, frankly, in most married couples, for the lower earner, it usually doesn't make sense to wait all the way until age 70. The reason for that is when the lower earner waits to file for benefits, it increases the household benefit as long as both people are still alive. So, in other words, the larger benefit that results from this person delaying, from the lower earner delaying, that larger benefit will end as soon as either person has died. And so, we're looking at a joint-life expectancy, but it's a first-to-die joint-life expectancy, which is by definition shorter than either of the two individual spouses' individual life expectancies. And so, because it's a shorter life expectancy, it's a shorter period of time that we're on average going to be receiving this benefit. So, it's not usually advantageous for that person to delay for very long. But, of course, the age differences between the two spouses and other various factors can come into play.

Benz: You've referenced just now a couple of situations when it might not make sense to delay. Let's talk about a couple of other common scenarios. How about a single person who is in pretty good health? Would it usually make sense to delay in that situation?

Piper: Yes, it does. For a single person in average health even, it typically makes sense to file anywhere from age 68 to 70, and that's purely looking at it actuarially. So, we're not accounting for the fact that it's usually advantageous from a tax standpoint to delay benefits. It's also not accounting for the fact that delaying benefits is helpful from a risk-reduction standpoint because you're getting longevity risk protection when you delay benefits. So, for a single person in better-than-average health, yes, it almost always is going to make sense for that person to wait until 70. There are some uncommon exceptions, but it will usually make sense for that person to wait until 70.

Ptak: What about married couples and how they should approach this? You just brought up one scenario where there's a disparity in the earnings level of the couple. But what about earnings, histories, age, health? How does that fit in?

Piper: With earnings history, a good default plan is for the higher earner to wait all the way until age 70 and for the lower earner to file early, not necessarily as early as possible, but usually not waiting all the way until age 70 and often not waiting even until their full retirement age. The reason for that is when the higher earner delays benefits, it increases the amount that the couple gets as long as either person is still alive. So, in this case, we're talking about a joint life expectancy, but it's a second-to-die in joint life expectancy. It's a longer joint life expectancy. And so, this makes it especially advantageous for that person to wait for benefits. In other words, we're increasing that person's own retirement benefit, but we're also increasing the survivor benefit that the other person, the lower earner, would get if the lower earner were to outlive the higher earner. So, it's especially advantageous for the higher earner to wait. But that exact fact is the reason why it's less advantageous for the lower earner to wait. So, that's just dealing with respective earnings histories.

Once you look at age differences, essentially, the younger your spouse is relative to you, the more advantageous it is for you to delay benefits. Because let's imagine you're age 62, if your spouse is 10 years younger than you, they are age 52, well, that makes the applicable joint life expectancy somewhat longer. If they're 10 years older than you, so they are age 72, that makes the applicable joint life expectancy somewhat shorter. So, again, just the older you are relative to your spouse, the more advantageous it is for you to delay benefits.

And then, as far as health, with that it's a question of, again, how long will it be before one spouse has died? That's the question that's relevant for the lower earner. Whereas for the higher earner the question is, how long will it be until both spouses have died? So, for the lower earner, if either person is in poor health, that's a point in favor of that person filing early. Whereas for the higher earner to want to delay, both people will have to be in very poor health.

Benz: So, delayed filing doesn't mean that you're doing this in a vacuum. You have to get your money from somewhere assuming that you're retired. If someone is delaying filing, that means that their portfolio withdrawals early on in retirement might be higher. What happens if that scenario coincides with a bad market environment? How would you suggest people approach that? Obviously, you'd tell them to derisk their portfolios, so they are not in the situation where they are having to withdraw from depreciating equity assets. But what's your counsel there in thinking about how the portfolio interacts with these withdrawals with filing from Social Security?

Piper: What a lot of people have started to talk about in the past few years--Steve Vernon, for instance, is an actuary who has talked about this concept--is creating a Social Security bridge with the idea being that if you know you're going to be retiring at a certain age and then not starting Social Security until some later age, in advance you will allocate a portion of your portfolio to safe assets to very confidently be able to provide that extra spending from the portfolio until that Social Security benefit kicks in. For instance, if it's going to be seven years between the date you retire and the date your Social Security benefit is going to start, then you might create a seven-year bond ladder or a seven-year CD ladder to be able to very safely provide that additional level of spending from the portfolio, so that way you're not risking this very bad outcome where you're spending from an equity portfolio at a high rate and at the same time, the equity portfolio is declining rapidly, just because you get unlucky in terms of the timing of a bear market. By creating a portion of the portfolio that's specifically dedicated to the extra level of spending until Social Security kicks in, you're essentially alleviating that risk.