Maybe You Shouldn’t Delay Taking Your Social Security Benefits After All

Key Takeaways

• Adding annuities and Social Security to your portfolio withdrawals will lead to higher spending while increasing the efficiency of guardrail strategies
• Delaying Social Security gives you a bonus on the amount the Social Security Administration owes to you
• If you want to retire before age 70 and don’t have an alternative income source, you might not want to delay your Social Security.
• A bridge strategy builds an income cushion so you can postpone taking your full Social Security
• If you’re able to, it’s better to postpone retirement as a bridge strategy to delay Social Security.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Financial experts agree many of us are better off delaying filing for Social Security if we can afford to. But some new research from Morningstar suggests that may not be the case quite as often as you might think. Joining me to discuss this new research is Jason Kephart. Jason is director of multi-asset ratings for Morningstar and co-author of the new research report The State of Retirement Income. Viewers can download the research via a link beneath this video. Nice to see you today, Jason.

Jason Kephart: Thanks for having me, Susan.

Social Security and Annuities as Retirement Spending Strategies

Dziubinski: In Morningstar’s latest retirement income paper, you took a look at the impact of some nonportfolio guaranteed income sources, such as Social Security and annuities on retirement spending strategies. What did you find when you add these into the mix?

Kephart: Very broadly, we found when you add this into your portfolio withdrawals, you’re generally going to end up with higher spending, which isn’t super surprising. But what we found was for the guaranteed income like annuities and TIPS ladders you tend to end up with lower ending balances. That’s because you need an outflow from the portfolio to get this guaranteed income. But I think the guaranteed income that most people are going to get is Social Security. And that’s one that I think is really interesting because not only does it increase your spending, but some of the flexible withdrawal strategies like our guardrail strategy become more efficient when you add Social Security into the mix.

Why Delay Social Security?

Dziubinski: Let’s drill down specifically to that data you looked at that was related to Social Security and lifetime retirement income. First, before we get to that, remind viewers why Social Security is often encouraged to delay filing rather than to take it at your full retirement age.

Kephart: Because at 67 at your full retirement age, you get about 100% of what is owed to you by the Social Security Administration. Every year you delay it, though, you get an extra bonus. So at 70, you get like 124%. So, delaying it gives you more money, which is a good thing, but also there might be challenges getting to that 70 mark before you claim it.

The Benefit of Taking Social Security

Dziubinski: Jason, while a lot of financial experts and professionals say that it does make sense for a lot of people to delay, they’re kind of saying that in isolation. Your research found that it may not make as much sense to delay to say, age 70. If you don’t know where your income is going to be coming from to pay those bills between the age that you retire and age 70. Delve into that.

Kephart: It really comes down to the people who want to retire before age 70 but still wait till 70 to claim Social Security. You’ve got to figure out how you’re going to pay for your bills in between then, living expenses, vacations, what have you. And if you happen to tap into your portfolio between that period, well then that’s less money that’s going to appreciate over time what’s left over from the retirement withdrawals. I think that’s the challenge you really have to think about. Now you could have income sources from things like rental properties, maybe your spouse is still working. So, there might be other income sources, but what you have to think about is, “How am I going to get from retirement to age 70?”

What Is a Bridge Strategy?

Dziubinski: The data in your research indicates that delaying Social Security is the best solution for those investors who have what you call a bridge strategy. What’s a bridge strategy?

Kephart: A bridge strategy is how are you going to pay for the bills basically, right? And we’ve touched on it could be other sources of income, and for most of you it might have to be with portfolio withdrawals, and that might be fine, but I do think you have to really consider those trade-offs. I think our safe withdrawal rate was 3.7%. So, if you’re taking 3.7% out of your portfolio, well that’s only 94% of your portfolio you’re going to have left to appreciate and grow along with the markets over the long term. And so, as you’re taking these portfolio withdrawals out in the meantime, you’re essentially trading off spending now for your ending balance at the end of the retirement.

Dziubinski: What about those who retire at their full retirement age and delay filing until age 70, but then have to use those portfolio withdrawals to meet those income needs? The ramification is they’re going to have less at the end?

Kephart: That’s what we found is you have less money at the end, all else equal. And I think that’s just something people have to think about, and maybe you’re OK with that. Maybe you want to retire and you’re fine spending from your portfolio, and that’s totally cool. But I think those are the things you just have to consider. I think what people say, “Delay as long as you can,” you just have to think about it a little bit more. It’s not just as easy a decision as “Let’s just wait.”

Should Investors Delay Social Security?

Dziubinski: What would you say is the final takeaway here for investors Jason, to delay or not to delay?

Kephart: I think in a perfect world, if you’re happy working till 70 and waiting to retire at 70 and take Social Security, then that’s what we found is the best solution, but I think it’s not realistic for most people. Most people might be forced to retire earlier than they want, and some people might want to retire earlier. You need to think about where you’re going to get the money from, and if it’s from your portfolio, the more you’re taking out earlier the less you’re going to have at the end, even with Social Security being higher payouts by delaying.

Dziubinski: Jason, thank you for your time. This is really great new research around a topic that’s of huge interest to anybody who wants to retire.

Kephart: Thanks for having me, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch Ask Your Advisor These Questions Before Investing in Liquid Alts for more from Jason Kephart.