Is Delaying Social Security Still Smart?

May 5, 2020 / Amanda Chase, Horsesmouth Assistant Editor

Among financial planning cognoscenti, the standard advice for Social Security is to delay filing past full retirement age for as long as you possibly can in an effort to enlarge your eventual benefit. After all, you can increase your benefit by about 8% for each year you wait past full retirement age up until age 70. But is the advice to delay still sound amid the current coronavirus crisis and market drop? After all, the pandemic has introduced some new challenges, both for investor portfolios and arguably for the program itself.

It’s true that stocks’ drop between late February and late March accentuates their return prospects a bit. But Morningstar Investment Management’s head of retirement research David Blanchett argues that stocks are still likely to underperform the 8% annual benefits pickup you gain by delaying Social Security. Indeed, he argues that stocks aren’t the right point of comparison for Social Security claiming in the first place. Because the benefits enhancement of delayed filing is guaranteed, the best point of comparison would be safe investments like cash and bonds, whose yields have been depressed by the Federal Reserve’s actions and the ongoing flight to quality.

Even if most individuals would be better off delaying Social Security to enlarge their eventual benefits, might someone with a very risky portfolio that has dropped a lot be better off claiming Social Security now if the choice is to invade equity assets after they’ve fallen? Blanchett doesn’t think so. “People sometimes try to invest their way out of a retirement shortfall since stocks tend to outperform bonds, but what we’ve just experienced is an example of why this is a bad idea. That’s especially true because market drops are also associated with negative economic events like layoffs.”

The annual Social Security and Medicare Trustees Report, released last week, indicated that the Social Security trust fund will be exhausted by 2034, barring changes to the program. At the same time, it’s worth noting that the fund only covers about a fourth of the cost of the Social Security program; the bulk of the funds come through payroll taxes. Thus, even if the trust fund runs out, that would only jeopardize a portion of promised benefits. Thus, it’s a mistake to assume that Social Security benefits will go to zero.

Nonetheless, it’s only reasonable to acknowledge that the current pandemic and its implications for the economy and jobs may well have some impact on Social Security’s funded status. After all, the aforementioned trustees’ report didn’t factor in any of the economic challenges that have been brought on by the pandemic.

As always, the Social Security filing decision should be viewed as part of a broader mosaic of retirement funding. Sue Stevens, a wealth advisor at Buckingham Strategic Wealth, says “We look at Social Security as one part of several sources of income during retirement. We want to look at these sources in combination to find the best mix of portfolio withdrawals, pension payments, annuity options, and other sources like rental income or part-time employment. The tax implications of those income sources should be very thoughtfully weighed.”

You can find the full article at Morningstar.

 

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