Should I File for Social Security Now or Later?

Dear Carrie,

I'm 61 and will be retiring next year. I’m trying to decide if it’s better to start taking Social Security right away, preserving my 401(k), or draw down my retirement account first and wait to claim Social Security until later?

—A Reader

Dear Reader,

I love this question for several reasons. First, it uncovers an important and often overlooked feature about Social Security: when you retire and when you file for benefits are two important but distinct choices. You aren’t required to claim Social Security as soon as you retire.

Second, as you point out, taking Social Security earlier rather than later can allow you to preserve your other retirement assets. However, you have to be careful here because your Social Security benefit is a guaranteed lifetime benefit by the U.S. government and has built-in inflation protection. Clearly that's not the case with investments in the stock market. Evaluating one vs. the other isn't an apples-to-apples comparison.

And third, on average postponing filing for Social Security, thereby allowing your benefit to grow, is the better choice. One study has estimated that early filing costs the average household $111,000 over their lifetimes. Far too many people either don’t understand this, or simply succumb to the urge to “take the money and run,” filing at their first opportunity.

That said, there's no universal optimal way to balance the two. Every individual is different and the correct answer for you depends not only on all of your other sources of income (including your retirement accounts), but also many other factors such as your lifestyle, health, expectation of longevity, and desire to care for family members. In other words, you have to consider your complete financial and personal situation before you can determine how best to maximize both your savings and your Social Security benefit over the long term.

Even though most people are eligible to collect Social Security at age 62, their benefit will continue to increase between 6 and 7 percent for every year they delay up to their "full retirement age" (FRA). Your FRA is between ages 66-67 depending on your birthday. After that, it will increase by 8 percent every year between FRA and age 70, at which time it maxes out. As a rough example, a monthly benefit of $1,000 at age 62 would increase to approximately $1,760 by age 70.

In other words, if you file early, you’ll have extra income in your 60’s but your benefits will be permanently reduced. If you wait, you’ll likely enjoy a higher inflation-adjusted floor of income into your 70’s, 80’s, and possibly beyond.

Conscientious retirement planning takes time and attention to detail. Most people will benefit from consulting a financial planner before they make a major decision such as the optimal time to file for Social Security. But whether you decide to work with a professional or not, you’ll need to start by having a complete up-to-date understanding of your total financial picture—including the amount and composition of the resources (pension, 401(k), IRA, brokerage accounts, part-time work, home equity, etc.) you can draw upon in retirement.

This exercise is crucial because it will show you not only how much money you’ll be able to safely withdraw from your various accounts over your anticipated retirement, but also whether that amount is sufficient to support your lifestyle—and allow you to postpone filing for Social Security.

Digging a little deeper, your asset allocation, investment holdings and drawdown strategy also come into play. The more conservative your investments, and the lower your expected rate of return, the more it may make sense to delay filing for Social Security. Conversely, the higher the expected rate of return of your investments, the more it may make sense to hold on to your investments and claim early. Of course, aggressive investments may or may not ultimately pay off, so you have to weigh the balance between risk and return and carefully assess your ability to withstand downturns.

That being said, the situations in which delaying claiming Social Security works best—unexpected longevity, high inflation, and poor market returns—are the same scenarios in which many investments tend to struggle, and why Social Security is better viewed as a form of insurance than an investment.

Another important factor is your health and anticipated longevity. Clearly the longer you live, and the more years you have to collect a higher benefit, the more sense it makes to delay filing for Social Security. On the other hand, if you're in poor health, you may be wise to take benefits earlier.

Also consider your family. Once you file, your spouse age 62 or older and dependent children under age 18 may also qualify to receive a portion of your Social Security benefit based on your record. If you predecease your spouse, they're eligible to collect on your Social Security benefit. In this case, delaying filing will typically provide a larger benefit for your survivors.

As you can see, finding the optimal time to file for Social Security is a complex decision. To summarize, here are a few things to think about:

1. Consider delaying if you can afford to wait and if you're in good health and anticipate a long life.
2. Consider claiming early if you don’t have the financial resources to wait, or if you anticipate shorter than average longevity.
3. Factor in the expected return of your asset allocation, your appetite for investment risk and desire for guaranteed income.
4. Be mindful of how your timing can impact spousal and family benefits.

There's no question that retirement can be one of the most fulfilling times in our lives. But at the same time, making sure you have the financial security to enjoy these years requires a lot of thought and preparation. So take your time. You don’t have to file for Social Security right away. Instead, talk to a financial planner who can help you integrate Social Security into your retirement plan, examining various “what if’s” and the impact of different claiming and withdrawal strategies. You’ll be glad you did.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.