The Missing Element in the 62 Versus 70 Social Security Debate: You

There is a new hot topic trending in personal finance lately, and it is a bit of an odd one: when to start claiming Social Security benefits. Should you claim when you are first eligible at age 62, even though the monthly payout is reduced? Or at “full retirement age,” 67? Or at 70, when you can get your biggest possible monthly check? Social media financial influencers—“finfluencers”—preach starting at 62, even if you don’t need the money, and plowing it all into stocks for higher returns. Those critiquing them warn they are ignoring the risk of market downturns, potentially setting folks up for an impoverished retirement—and tout the benefits of delaying until 70. We think they all make a key error.

Yes, it is true that the early-benefits proponents are projecting stocks’ historical annualized returns forward using straight-line math, creating unrealistic expectations. Stocks’ average annualized return is not a typical annual return. Rather, it is the annual rate of return that would deliver stocks’ cumulative long-term return since 1926 when compounded.^[i] It is a way of boiling quintuple-digit returns into something more relatable. That is useful! But it averages out extremes that happen year to year, bull market to bear market. Stocks don’t rise year in, year out. And given it is nearly 20 years since global investors endured a classic, grueling, long bear market, the risk of prolonged decline is gradually fading from the public consciousness. Early-benefit preaching risks adding to this complacency and leaving folks with dangerous expectations.

But that doesn’t mean delaying benefits because of the risk of bear markets is the right approach either. It actually makes the same mistake, at its core: Using straight-line math to project bad returns forward. Both also put the entire focus on returns. No other considerations seem to enter.

And that is the fatal flaw: It ignores why people need investment returns and Social Security to begin with. Generally speaking, you invest because you have goals, and you need the market to help you reach those goals over a given timeframe. Myopically focusing on the returns you could get by investing your Social Security benefits takes your goals and time horizon out of the equation.

Think it through. Your goals are the purpose for your money. They usually boil down to growth, cash flow or—in all likelihood—some combination of the two. Your time horizon is the length of time you must be invested to reach those goals. Your personal circumstances, including your Social Security benefits, may affect your goals, too. The right asset allocation for you is the one that generates the returns likeliest to help you reach your goals over your entire time horizon.

So, say you are investing to fund your retirement. You will probably need to pencil in periodic cash flows—enough to cover your expenses, understanding inflation will probably raise those expenses over time. If you take your Social Security benefits at age 62, lowering your monthly payout for life, then you are likely asking your investments to do more of the heavy lifting in the cash flow department. And if that is the case, and you are counting on high returns touted by finfluencers to sustain you, then you could end up taking on more equity exposure than is generally wise for your needs, depending on the size of your cash flows and your time horizon. Doing so could raise the risk of having to sell more securities to fund your needs during down markets, raising the risk of having too little left late in life—when medical expenses typically mount.

If you have higher cash flow needs, it could very well be wiser to have a blend of stocks and bonds, which lowers your expected volatility … with the tradeoff of lower returns. We say this not to scare you, but to point out that taking early benefits with the aim of securing high returns may raise your cash flow needs, making it wiser to take on a lower-returning strategy. That is a cold dose of reality that seems to be in short supply on social media.

Just as your goals, needs and time horizon should determine the blend of stocks, bonds and other securities in your portfolio, they should probably also guide your decision on when to take Social Security benefits. The New York Times published a timely deep dive on this Sunday, titled, “Should You Really Wait Till 70 to Take Social Security?”^[ii] It explores the key factors claimants should consider, including their (and their spouse’s, if married) health and life expectancy, overall financial situation, job status and satisfaction and the general question of what do you want in your golden years. The point: Considering all these things is important, lest you let fear of Social Security’s solvency or other misconceptions lead you to a suboptimal decision.

Maybe taking early benefits is right for you. Maybe you need them to pay your bills. Maybe your health isn’t great and you anticipate having a lower life expectancy, so it makes sense to start claiming early in order to increase your total lifetime payout (delaying doesn’t start delivering a higher cumulative payout until around age 80). Maybe your spouse is planning to wait and has a significantly higher benefit than yours.

But if you are still working and plan to do so until (or even after) you hit the full retirement age, then delaying might be wiser. Delaying could also make sense if you are in good health and anticipate a longer life expectancy. Or if your benefit is higher than your spouse’s, in which case delaying could bless them with a higher survivor’s benefit if you pass away first.

There is no singular right answer. But the answer that is right for you will depend on your unique needs. It isn’t exclusively a math equation tabulating the compound growth of this or that benefit, or how inflation adjustment affects benefits long term. People debating these things purely from a return standpoint neither know nor consider your needs. So we suggest tuning them down and taking a careful, holistic and fully informed look at your situation.