By Peter Mastrantuono
In light of this past month’s sharp stock market slide into bear market territory the calculus of when to begin Social Security may have changed for many newly retired individuals or near-retirees who are now looking at shrunken retirement savings.
The conventional wisdom suggests that retirees should wait until reaching full retirement age to begin receiving their Social Security retirement benefit. Indeed, many planners even recommend waiting until age 70 to take advantage of a yearly 8% step-up in the annual benefit payment.
Conventional wisdom, however, may no longer be relevant in view of current events.
An Overview of Conventional Wisdom
While the vast majority of Americans begin taking Social Security at age 62, it goes against the advice of most financial planners, and for good reason. Individuals who take early Social Security retirement benefits suffer a permanent reduction in their annual benefit payment of up to 30%. Advisors will generally only recommend commencing benefits at age 62 in cases of an unexpected job loss that creates cash flow difficulties or a shorter life expectancy (e.g., health problems).
The case for waiting until attaining full retirement age or delaying until age 70, even if that means tapping 401(k) or IRA assets during the interim period, is a strong one.
By waiting until full retirement age, individuals receive their full benefit for the remainder of their lives. Over the life of the retiree these higher payments act to reduce the pressure on personal savings. So, while it may sound counterintuitive to use 401(k) or IRA assets early while deferring Social Security benefit payments, the strategy may actually allow personal retirement savings to last longer.
This argument is even more compelling when accounting for the higher benefit payment that comes with delaying benefits until age 70.
The other advantage of using retirement assets during the early years of retirement in order to build Social Security benefit credits is that it may reduce the amount of Required Minimum Distributions that individuals will be required to take upon reaching age 72.
The Early vs. Wait Calculation
Determining the most advantageous age at which to begin taking Social Security is fairly straightforward math that financial advisors do all the time. It involves calculating a few variables, including expected life expectancy, tax rate and opportunity cost. In this instance, opportunity cost is defined as the lost investment return on the retirement assets spent in the period during which Social Security is delayed.
How A Bear Market Changes the Social Security Calculus
One of the quickest ways to exhaust retirement savings is to spend them while asset values are depressed. Selling investments at a low value to meet retirement expenses requires that more shares of an investment be sold—shares that will no longer be available to participate in a market rebound.
Additionally, most analyses use an opportunity cost that reflects average long-term capital market returns. However, bear market recoveries have historically posted returns substantially higher than average market returns. This distinction is important since it may have a significant impact on whether it makes sense to delay Social Security if that delay requires using severely depressed 401(k) or IRA assets to meet retirement expenses.
The decision to take Social Security early, at full retirement age or delay until age 70 is an important one having permanent financial consequences. The 2020 bear market may have upended conventional wisdom and, as a consequence, individuals may want to revisit their Social Security planning with their financial advisors.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.