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How Social Security Can Make Your Nest Egg Last Longer

When you claim benefits can have a big effect on your strategy for savings and investments

spinner image Deciding on when to start receiving Social Security should depend on many life factors.
C.J. Burton / Getty Images

Making your nest egg last a lifetime is a delicate dance between getting the most out of what will likely be your two main sources of retirement income: savings and Social Security. One key is figuring out which dance partner leads: Should you take Social Security early to give your investments more time to grow, or live off your savings at first to get a bigger benefit payment down the road?

For some retirees, it’s a matter of simple necessity. If you have little or no savings and can no longer work, you may have to take Social Security as soon as possible, even though claiming at the minimum age of 62 means getting 77 percent less per month than if you wait until age 70 to secure your maximum benefit. If you’re in poor health and don’t expect to live long in retirement, you might want to get what you can from Social Security while you can.

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But if you’re in fair health and have financial options, there are claiming strategies that can help maximize your investments and improve your chances of outliving your money.

There’s no one-size-fits-all solution.

“Deciding when to take Social Security benefits and/or tap into an investment portfolio will be unique to each individual,” says Matthew Fleming, senior wealth adviser at Vanguard.  

Here are some of the variables to consider, and claiming strategies planners say can make the most of them.

How much have you saved?

The larger your nest egg, the bigger your cushion for waiting to start Social Security benefits. Running down modest savings to put off claiming is a risk. Taking benefits early might also make sense if you can’t stomach the idea of leaving yourself short of emergency cash. 

This strategy is “more about behavioral finance,” says Bill Meyer, CEO of Retiree Inc., which makes retirement planning software and is a fully owned subsidiary of mutual fund company T. Rowe Price.  “What amount of savings do you want to have on the side that you feel comfortable with? That number is different for everyone.”

The average retirement account balance for people ages 65 to 74 is about $425,000, according to Federal Reserve survey data. Meyer says his research shows that retirees with nest eggs of at least $200,000 can make their money last up to 10 years longer by waiting to claim their maximum benefit. Once they do, the 401(k) or IRA withdrawals needed to pay bills will be much smaller and their balance decreases at a much slower rate. 

The bottom line is to run the numbers. 

“We will sit down with clients and say, ‘OK, this is how we're going to withdraw across accounts with your Social Security,’ and we'll show our clients, ‘Hey, if you take Social Security early, here's how long your money lasts. If you delay Social Security, here's how long your money lasts,’ ” Meyer says. “The key is to match your withdrawal strategy to [your] cash flow.”

How’s the market doing?

Living off your retirement savings can get dangerous in a down market. The combination of declining stock prices and retirement account withdrawals can cause your nest egg to shrink much faster than you planned and increase the odds that you’ll outlive your money. 

“In such a scenario, collecting Social Security may provide a stable income source not impacted by market volatility,” says Cameron Burskey, senior partner and managing director for retirement security at Cornerstone Financial Services in Southfield, Michigan.  

Say you’re following the “4 percent rule” and withdrawing that proportion of your 401(k) per year. If the market turns bear and goes down by 20 percent, you’ve effectively taken a nearly 25 percent loss. By claiming Social Security early and living off those payments during a downturn, you avoid having to sell investments you’ve accumulated over a lifetime at depressed prices, and you give your holdings a chance to rebound when stocks recover. 


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And remember, market recoveries don’t happen overnight. On average, it has taken about 14 months for the Standard & Poor’s 500 stock index, a proxy for the U.S. stock market, to recoup its losses from market decline of between 20 percent and 40 percent, according to S&P Capital IQ, a Wall Street data provider. 

“The biggest benefit of taking Social Security early is it gives you time until you really need to start taking a significant amount of money out of your investment accounts,” says Brian Walsh, head of advice and planning at online personal finance firm SoFi. 

Conversely, if the market is firing on all cylinders and you can cover expenses with withdrawals from your growing investment account, delaying Social Security might make more sense.

“A raging bull market could give you breathing room to wait for a bigger [Social Security] paycheck for years to come,” says Brandon Robinson, president and founder of JBR Associates, a Dallas-area investment firm that specializes in income strategies for retirees and pre-retirees.  But he recommends this strategy only if the income you draw from your investments doesn’t eat into principal — the amount you’ve contributed to the account.

What kind of investor are you?

Are you a risk-taker when it comes to the market? Or the conservative type more interested in preserving the money you’ve already socked away? The answers to these questions can also play a role in deciding when to claim Social Security. 

A conservative portfolio generally means more-modest returns. In this case, delaying Social Security for as long as you can afford to makes sense, Robinson says. The bigger guaranteed income that comes from maximizing your monthly benefit “will provide a much greater sense of security and certainty,” he says. 

Most people do dial back stock exposure and rebalance their portfolio toward less-risky assets as they near or enter retirement, which reduces the growth potential of a 401(k) or IRA, says Wade Pfau, a professor at the American College of Financial Services and director of retirement research at McLean Asset Management Corporation. 

“If your portfolio is 40 percent stocks and 60 percent bonds, it’s really hard for your investments to beat the power of delaying Social Security,” he says.

A more aggressive investor who keeps most assets in stocks might want to claim Social Security early so they can leave a higher-yield portfolio intact — perhaps even investing their monthly benefit, if they have another income stream to cover their bills, such as a pension, annuity or rental property. 

With this strategy, you’re essentially taking on more risk in hopes of generating a bigger gain. It’s not a plan for the faint of heart, or for those without a financial fallback.

“To generate the returns needed to beat the benefit of delaying Social Security, there would need to be a high tolerance for risk and an aggressive asset allocation, not to mention plenty of discretionary wealth,” according to a recent paper in the Journal of Financial Planning by Pfau and Steve Parrish, codirector of the Center for Retirement Income at the American College of Financial Services. 

Even with a relatively aggressive investment strategy of 75 percent stocks, their research found that “it is uncommon for investment returns to beat the implied benefit of delaying Social Security for long-lived retirees.”

Is passing on wealth a priority?

Census data shows that Americans who reach age 65 can expect, on average, to live into their mid-80s. If your goal is not just to support yourself comfortably through a long retirement but also to leave an inheritance, waiting to get your biggest Social Security benefit is the best way to preserve your nest egg, according to Pfau and Parrish’s study, which focuses on how claiming decisions can affect financial legacies. 

They hypothesized a 62-year-old retiree with $1 million in savings and $50,000 in annual expenses and applied different scenarios for allocating assets and starting Social Security. In nearly all cases, they found that the retiree would have more left in their investment account at age 85 if they waited until 70 to claim benefits rather than doing so at 62. 

Depending on the stock allocation in their portfolio, they could even end up with a larger balance to pass on to your heirs, especially if they live into their 90s, the researchers say.

That’s because the 77 percent bigger Social Security payment you claim at 70 and collect for 15 or more years provides a better return over time than you’re likely to get trying to maximize investments from the start of retirement. That was the case even for a balanced portfolio with 50 percent stocks, according to Pfau and Parrish’s model.

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