Social Security: Deferral Isn't for Everyone

(WSJ image)

Most popular financial literature recommends that Social Security recipients not claim early retirement benefits at 62 but wait until "full retirement" age between 66 and 67, depending on the year of birth. If possible, one should wait until 70 to maximize the monthly benefits.

Each year of deferral raises the payment by about 8%, which can amount to a substantial number if one lives a long life. After a discussion with family members, your humble pensioner filed for benefits at the age of 66.

Although I was confident that I would make it to at least 90 (justifying delaying benefits to 70), others weren't so sure. (My family is a barrel of laughs.)

The WSJ lists poor health and current cash flow shortfalls as two reasons to take Social Security earlier rather than later.

There is little sense in delaying if—because of health or genetics—you think there is a good chance that you’ll die relatively young. There also may be little sense to wait past full retirement age if survivor benefits aren’t necessary for a spouse...

Early payouts can help when there are shortfalls between income and expenses...

Indeed, while delaying made more sense a few years ago, when near-zero interest rates meant there was less incentive to hold on to cash, the equation has changed. Now that interest rates are higher, fixed-income allocations may produce more significant returns in a portfolio. So, taking payouts now and using them to help with cash-flow shortfalls means your savings in your portfolio can stay intact, compounding and growing.

“Right now you can earn 5% on cash,” says [retirement researcher David] Blanchett. “The higher the returns you expect to earn in the market or on interest rates for annuities, the more claiming early can make sense.”

We know a couple of families whose budgets are strained because they're waiting until 70 to maximize their benefits. Although in the long run that still might be the best decision for them, I'm not confident that it is; these families have been forced to sell some assets or withdraw funds from retirement plans to pay expenses.

Financial rules-of-thumb are generalizations that don't fit every individual situation. Run the numbers, or get someone to help you. Then make the decision using the best information you have, and don't look back.