Social Security: For some, early claiming is better

Waiting until age 70 to claim Social Security can help many investors protect against outliving their money and boost their lifetime benefits. But for someone with little to no risk of outliving their assets, an early claiming strategy can give them more money in the near and middle term as well as offer tax advantages. That’s the primary finding in a new Vanguard research note, “Claiming Social Security early: A spectrum of breakeven and longevity risks.”

“When someone is spending only a small portion of their portfolio, their concern should shift from outliving their assets—longevity risk—to passing earlier than anticipated, which creates a need to identify the Social Security benefit breakeven point,” said James M. Passman, wealth planning methodology analyst at Vanguard and lead author of the research note. “For these people, the top priority might then become leaving as much as possible to a loved one or a cherished cause.”

In general, those with little to no risk of running out of money during retirement are most likely to benefit from claiming early. This group can include ultra-high-net-worth individuals, who can fund expenses to near-perpetuity, and those with shorter life expectancies. Passman notes that retirees with pensions that cover all of their spending needs, and minimal spenders, especially those with very consistent, predictable expenses, may also be part of this group.

A claiming strategy is a highly personal decision, one that individuals should carefully consider based on their circumstances, lifestyle choices, and the understanding that their future needs and wants may differ from today’s. Financial modeling tools—like those used in consultation with a financial or tax advisor—can help someone grasp the most relevant trade-offs for their specific situation. This information can then be used to build out a comprehensive strategy that suits their needs.

For those who choose to claim early, there could be significant advantages. Early access to Social Security benefits can reduce the amount an investor draws from a stock or bond portfolio—particularly in the near and middle term—which can help preserve assets for legacy bequests.

Then there’s the behavioral aspect—specifically, the fact that people often place a higher value on a dollar today versus a dollar tomorrow. Although this mindset doesn’t always align with wealth maximization, its commonness means that for some retirees, the intrinsic value of earlier access to a payout can also come with psychological value.

Finally, there are the implications for income tax and Medicare surcharges. "Claiming Social Security early can provide immediate financial rewards and spread the tax burden over more years,” said Passman. “This can help reduce the relative tax burden and the Medicare surcharges a retiree might have to pay." 

In their research, Passman and his co-authors compared the outcomes for a hypothetical investor—“Wally”—when he claims Social Security at either age 62 or 70 (full retirement age is age 67 for those born in year 1960 or later).  Using the Vanguard Capital Markets Model (VCMM), the researchers projected that Wally would meet his spending targets in each of the 10,000 market scenarios generated.

“Since longevity risk isn’t a concern for Wally, delaying Social Security for a higher benefit doesn’t protect against outliving assets,” said Passman. “In fact, we found in this case study that Wally’s projected median wealth is higher if he claims at age 62 instead of at age 70. This holds true up until age 88, which is two years beyond his life expectancy.”

The research presented a second hypothetical case study that included both Wally and his spouse, “Wanda.” The five scenarios in this case study explored how different claiming strategies might play out in a two-person household depending on such factors as each person’s age, health, life expectancy, and income.

Although these case studies provide a solid foundation in terms of what elements should be considered when making a claiming decision, the decision itself remains intricate, and there is no ideal strategy for everyone. Investors should consider their needs and circumstances holistically when making their claiming decision, they may want to consult with a financial or tax advisor when choosing which claiming strategy makes sense for them. 

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