Social Security is a Critical Retirement Asset and When to Claim It Can Make a Big Difference

The occasion of National Retirement Planning Week offers an opportunity to reflect on two of the most important questions in retirement planning: when to stop working and when to take Social Security. Many older adults give the same answer to both of these questions, taking Social Security as soon as they stop working. But this doesn’t have to be the case, nor is it always the best option. And the timing of each of these decisions has significant financial implications.

Did you know that your Social Security benefits grow each year you delay claiming past age 62? Claiming at age 70 would give you a benefit that is 76 percent higher than if you claimed at age 62. This increase is substantial, and the rate of growth is hard to match in any other asset. This means that in many cases, it makes sense to delay claiming and let your Social Security benefits grow, whether by relying on other income or assets, or by continuing to work if you are able – or a combination of the two.

Of course, some people need to take Social Security early for any number of reasons. Health issues like illness or disability make up one of the most common reasons for leaving the labor force among older adults nearing retirement age. According to a recent Bureau of Labor Statistics report, 40 percent of adults aged 55 to 64 who are out of the labor force named health issues as the primary reason for not working. For these older adults, claiming Social Security early might make sense if working longer is not an option and if they have few other assets to rely on in old age.  If you need Social Security, take it, it’s there for you.

But for those who can wait, it definitely pays to do so. Each year you wait to claim increases your monthly benefits by between 6 and 8 percent. And this rate of growth is guaranteed. This can’t be said of many other assets in your portfolio. As one contributor to this blog has written, most near-retirees think of Social Security “in terms of a monthly amount such as ‘I’m going to get $1,500’ or ‘My benefit is only $700.’” However, it is often more productive to think of Social Security as an asset –  the value of which is variable –  that can complement your other assets. It can be thought of as a unique and particularly valuable asset in your portfolio because it offers inflation-adjusted, guaranteed income for life. Your goal, as it would be with any other asset, is to maximize the asset’s value. And waiting to claim is the best technique to accomplish this.

The best time for you to start claiming Social Security might not be right when you retire. Waiting to claim could set you up for higher benefits and greater financial security for the rest of your life. Research from the National Bureau of Economic Research has shown that waiting to claim is “actuarially advantageous for a large subset of people,” meaning that there is a good chance that you would be better off by delaying taking Social Security.

Some insist that Social Security can’t be thought of as an asset in this way because it is subject to legislative changes. But since 1935, Social Security has never missed a payment — and its finances are much stronger than many people think. Even without any changes, the program could pay full benefits for the next 18 years, and after that it would still cover about 80% of scheduled benefits. Congress has amended Social Security many times to meet new needs and serve new generations — and legislation, when needed, has preserved benefit levels for those already retired or nearing retirement age. Policymakers have many options to adjust revenues, benefits, or both, in order to ensure that all future benefits will be paid in full and on time.

When planning your financial strategy for retirement, carefully consider your choices when it comes to claiming Social Security. It is useful to think of Social Security as one of your retirement assets, which comes with some unique features. Thinking of Social Security this way could lead you to make choices that provide you and your family with greater economic security in retirement.