Social Security and Your Retirement Plan


Social Security income is a significant retirement asset that, for most Americans, serves as a core component of their retirement plan. As a government-backed, inflation-adjusted monthly income for life, these benefits help manage longevity, inflation, and market risks.

Those who qualify for retirement benefits can claim as early as 62 and as late as 70. When you begin collecting Social Security determines how much income you receive. One of the “hotter” topics in retirement income planning has been how to help individuals strategize their Social Security claiming decisions to maximize their benefits.

The rules for calculating and claiming Social Security are complex and confusing; however, generally, those who claim early could see as much as 30% less income than those who wait until age 70, who will receive the maximum amount available. There are also options for spousal and survivor benefits, which have additional eligibility rules and calculations. Consideration should be given to a number of factors, including life expectancy, health, and specific income needs. Without proper analysis, claiming benefits at the ‘wrong’ time could materially impact your resulting retirement income plan.

How someone views Social Security within their retirement income plan will often drive their claiming decision. There are three primary viewpoints on Social Security income’s role in a retirement plan:

  1. Insurance – Social Security income is inflation-adjusted and government-backed. With lifetime cash flows, they mitigate longevity, inflation, and market risk for retirees. This viewpoint sees social security as a way to avoid outliving your money, especially for those who underestimate their life expectancy. The goal is to delay claiming early and take advantage of the higher payments after Full Retirement Age, as it will really pay off if one experiences a long retirement.
  2. Investment – This probability-based viewpoint sees Social Security benefits as an opportunity to claim benefits early and invest them for higher returns. This approach amplifies the risk associated with these funds since the returns are not guaranteed. It also reduces the amount of monthly income available later in life when other savings may be exhausted.
  3. Lifetime Annuity – Some compare Social Security benefits to a commercial annuity and frame it as an annuity purchase. Delaying benefits should be one of the first considerations for someone considering an annuity since the implied payout rate for Social Security is better than commercial products available in the market.

For someone living to their life expectancy, it should not matter in principle what age someone claims their benefits. The increase in benefits from delay should precisely offset the fewer years that benefits will subsequently be received. It is important to note that the current actuarial tables used to calculate life expectancy are based on 1983 data. Given the increase in life expectancy over the last 40 years, it is helpful to think about the claiming decision in terms of how it plays out for a long or short retirement.

The consequences of different outcomes are summarized in the table below*.

Claim Early Claim Late
Short Retirement Worked Out Minimal Harm Done
Long Retirement Permanent Reduced Lifestyle Permanent Increased Lifestyle

The decision about when to start taking Social Security benefits should not be taken lightly. Regardless of how you view Social Security benefits, it is highly recommended that you perform an analysis to determine the best time to claim your benefits.

*Source: Retirement Planning Guidebook, 2nd edition by Wade Pfau, 2023.

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