Waiting to claim Social Security can mean more lifetime income and a stronger portfolio for clients—giving advisors a simple yet powerful way to help clients worry less about running out of money and feel more confident about the future.

“Delay taking Social Security” is standard advice in the financial planning world and a strategy that is baked in to many of the tools and planning models that advisors use in building retirement strategies for their clients. But while that guidance is backed by good data, it’s not necessarily easy for clients to understand and act on.

What makes delaying Social Security such a valuable strategy? The answer lies in the way that the strategy reduces the chance of running out of money at an advanced age, when clients are likely to need more financial resources, not fewer. And interestingly, the average advisor client is more likely to face a higher level of longevity risk.

Against the grain

Retiring clients are often interested in claiming Social Security benefits early on in retirement. In theory, doing so provides a stable source of income during a time of transition, and it preserves personal retirement savings in the short term, which clients may be reluctant to let go of.

Of course, there are circumstances where it does make sense to take benefits right away. In a married couple, for example, the person with the smaller benefit may want to start their payments as early as possible. But our data suggest that delaying the start of Social Security benefits offers critical benefits.

It’s hard to convey to clients just how risky a long life can be to your financial health. But it’s important for advisors to engage clients on this issue. At age 62, the average life expectancy for a man is 81; for women, it’s 84. But on average, advisor clients live longer than the general population, largely due to differences in wealth, education, and health.

Longevity risk is an imbalanced risk. Just as the consequences of arriving 10 minutes too late for a flight are far worse than arriving 10 minutes too early, the financial outcomes for those who live a long time can be worse than for those who pass away earlier than expected. Social Security benefits are guaranteed to last as long as your clients do. So, maximizing the value of those benefits is a powerful way to forestall the risk of outliving your assets.

Comparing strategies

Encouraging clients to delay claiming their Social Security benefits offers two critical advantages to those who outlive life expectancy: higher lifelong payouts and better preservation of their personal portfolio’s long-term value.

T. Rowe Price ran a hypothetical investor scenario to illustrate how these advantages might play out. (Note that this analysis applies to someone who never married, not necessarily to a divorcee, married couple, or widow/widower.)

The Ray example

Consider Ray, a hypothetical preretiree attempting to coordinate his Social Security benefits with $1,000,000 in personal retirement savings. Ray is planning to retire the month he turns 62. He wants a retirement income of $5,000 per month, and he expects to live until age 90.

Ray’s assumptions:

• Ray’s annual spending is $60,000 in after-tax dollars
• Withdrawals are made in addition to the $60,000 annually to pay taxes
• We use current law to determine federal taxation.
• Ray lives in a state with no income tax
• Social Security cost of living adjustment: 3%
• Annual spending growth rate: 2%
• Moderate market returns: 5.3% every year

The table in Figure 1 estimates Ray’s outcomes if he initiated Social Security benefits at age 62, age 67, and age 70. The findings are striking. Notice, for example, that if Ray takes his benefits at age 70, he will end up receiving significantly higher Social Security payouts over his lifetime by the time he reaches age 90.

This is because Social Security provides the maximum benefit to those who claim at age 70; any claims prior to that are at a reduced rate. So, for every year a client delays claiming benefits beyond the earliest eligibility age of 62, they receive a higher monthly benefit. In Ray’s case, even though waiting to take Social Security until age 70 would mean he gets the benefit for eight fewer years, he would still receive much more in Social Security benefits. And the higher benefit he receives results in smaller withdrawals from savings, which means a higher total portfolio balance at age 90. We’ll explore this example and portfolio preservation in more detail in the next section.

Preservation and growth of portfolio value

The Ray example also shows something that may be counterintuitive to some clients: Delaying Social Security can help maintain their personal retirement portfolio value for a longer period.

When clients postpone taking Social Security, they may initially rely more heavily on their investment portfolios to meet income needs. However, once Social Security benefits kick in at age 70, the increased value of those benefits significantly reduces the size of withdrawals needed from their retirement portfolio.By reducing annual drawdown amounts, the retirement portfolio can last longer.

In this exhibit, Ray’s portfolio estimates claiming benefits at age 62 are compared with those if he waits until age 70. The client delaying Social Security achieves a higher portfolio balance later in life when longevity is more of a concern. The reduction in retirement savings drawdown starting at age 70 means the portfolio can hold more of its value, support legacy planning and help to meet unexpected financial needs over the client’s remaining lifespan.

While claiming Social Security at age 70 may seem less rewarding at first, the portfolio value surpasses early claiming at age 62 around age 81—making it a smart strategy for those anticipating a longer retirement.

Again, this advantage only kicks in for clients who live a long life—it it takes until about age 81 before the portfolio value of the age 70 scenario outpaces the value of the client who takes their benefits at age 62, as illustrated in Figure 2. And many people already wait until beyond age 62 to take their benefits. But for the typical individual, and especially for advisor clients, living longer than 20 years in retirement is not an uncommon outcome.

A dual defense against longevity risk

The implications of this data are profound. Each year a client delays beginning benefits from age 62 to age 70, they will receive additional guaranteed income every month of every year for the rest of their life. These higher payments alone act as a robust hedge against longevity risk since it means more income when/if a client lives beyond average life expectancy.

Delaying benefits can also extend the life of your clients’ personal retirement portfolios. Higher health care costs and potential long-term care costs are more likely to occur and at higher expenses, later in life. A higher Social Security payment and a higher portfolio value are two excellent strategies to hedge against these and keep clients from facing difficult financial choices.

When you model the alternatives, delaying Social Security is a best practice that can benefit a majority of retiring clients. The benefits of doing so are significant, even if the client must draw down their retirement savings for multiple years prior to age 70. Higher Social Security income and a greater sustainability for your clients’ retirement portfolios is a powerful combination. Put together, these two advantages can dramatically minimize clients’ fears about longevity risk.