The core trade-off: Guaranteed vs. Growth
Choosing between taking Social Security early or using your personal savings—such as a 401(k) or IRA—is a fundamental retirement planning dilemma. The decision hinges on a central trade-off: a guaranteed, lower income stream for a longer period versus relying on potentially higher-growth but riskier investment accounts.
For many, the conventional wisdom has been to delay Social Security as long as possible, up to age 70, to maximize the monthly benefit. Each year you wait past your full retirement age (FRA) until age 70, your benefit increases by 8%. However, this strategy requires you to tap into your personal savings to bridge the income gap. The reverse approach is to take Social Security as early as age 62, accepting a permanently reduced benefit (up to 30% for those with an FRA of 67). This allows your personal investments more time to potentially grow untouched.
Benefits of taking Social Security early
For some retirees, particularly those with a large nest egg or concerns about their health, claiming Social Security early can be a viable strategy. It offers several benefits, especially when used in combination with other financial tools.
- Immediate access to income: Taking your benefits at 62 provides an immediate cash flow source. This can be crucial if you face an unexpected job loss or have immediate financial needs.
- Investment flexibility: By using Social Security for your immediate income needs, you can allow your 401(k) or IRA to continue growing and compounding. This can be a particularly effective strategy during periods of market volatility.
- Addressing longevity concerns: If you have a family history of shorter life expectancy or have health concerns, taking benefits earlier means you collect them for a longer period. This could lead to a higher total lifetime benefit if you don't live long enough to reach the break-even point for delaying.
- Strategic spousal benefits: A married couple can use a coordinated strategy where the lower-earning spouse claims early to provide household income while the higher earner delays their claim to maximize their benefit.
Drawbacks of using savings to delay Social Security
While delaying Social Security to grow your benefit is often recommended, it is not without risks. Drawing down your savings early to live on comes with its own set of potential drawbacks.
- Sequence of returns risk: Withdrawing money from your portfolio during a market downturn can severely damage its long-term viability. When you take money out, you lock in your losses, and your portfolio has fewer assets left to recover when the market rebounds.
- Potentially outliving your savings: Drawing down your nest egg over a longer period, especially with higher initial withdrawals, increases the risk of running out of money, which can be a significant concern given rising longevity.
- Healthcare costs: If you retire before age 65 and use your savings to cover expenses, you will also need to pay for health insurance out-of-pocket until you become eligible for Medicare. These costs can be substantial and deplete your savings faster.
- Loss of control: Once you take your Social Security benefit, the monthly amount is largely set, outside of cost-of-living adjustments. Your savings, however, offer more control over the withdrawal rate and can be adjusted based on market performance and your spending needs.
Comparing early Social Security vs. using savings
| Feature | Taking Social Security Early (e.g., at 62) | Using Savings (e.g., delaying Social Security) |
|---|---|---|
| Monthly Income | Lower, permanently reduced benefit. | Higher, thanks to delayed retirement credits. |
| Investment Portfolio | Potentially preserves and grows investments for longer. | Drawn down earlier to cover expenses, potentially reducing portfolio longevity. |
| Risk Profile | Reduces investment risk in early retirement by providing a guaranteed income stream. | Exposes your portfolio to sequence of returns risk, especially in the early years of retirement. |
| Longevity Hedge | Less effective. If you live longer than average, you miss out on higher lifetime benefits. | More effective. The higher benefit amount offers more protection against outliving your savings. |
| Flexibility | Offers a stable, predictable income but locks in a lower monthly amount. | Provides more control over annual income by adjusting withdrawal rates based on market conditions. |
| Spousal/Survivor Benefits | The survivor benefit for your spouse is permanently lower if you were the higher earner. | Maximizes the survivor benefit for your spouse if you were the higher earner. |
Final considerations and conclusion
The decision of whether to take Social Security early or use your savings is highly personal and dependent on several factors. The optimal strategy for one person may not be the best for another. Financial planners, such as those with Thrivent, often recommend running your specific numbers to develop a personalized claiming strategy.
Consider your health, life expectancy, overall savings, and risk tolerance. If you have a large nest egg and are a conservative investor, using your savings to delay Social Security might be the best option, effectively “buying” a higher guaranteed income for life. If you have more modest savings or face health issues, taking Social Security early could provide crucial income and flexibility. The best path is the one that aligns with your specific circumstances and goals for a secure and comfortable retirement. For many, the guaranteed 8% annual increase for delaying is a safe, effective hedge against outliving your money, a return that is hard to consistently beat in the market.
Understanding Medicare and other benefits
It's important to understand how your decision affects other benefits. Even if you delay Social Security past age 65, you must still sign up for Medicare. Failure to do so can result in permanent premium penalties. This is an essential detail to consider when bridging the gap with savings. Additionally, remember that Social Security benefits are taxable, and claiming early could affect your tax burden over a longer period. Weigh all these components carefully before making your final decision. The Social Security Administration's website is a valuable resource for estimates and tools to help with your planning, as noted in their publication When to Start Receiving Retirement Benefits.
Ultimately, a thoughtful, comprehensive approach—which may include consulting a financial advisor—is the best way to determine the right time to claim your benefits.
