Morgan Stanley
Wealth Management

When Should You Take Social Security?

Oct 9, 2024

Deciding when to claim Social Security can have a significant effect on your retirement income. Learn how to help maximize your benefits.

Author
Dan Hunt

Key Takeaways

  • How long you expect to live can be an important factor in deciding when to claim Social Security to maximize the amount of benefits you receive.
  • Delaying Social Security will increase your benefit amount, but in the interim you may need to rely more on other income sources, such as your investment accounts—an approach that can entail risks.
  • Nevertheless, this trade-off may be worthwhile for many people: Our analysis suggests that deferring Social Security can offer the equivalent of a 6.3% annualized return,1 with no market risk.
  • The best approach to claiming Social Security depends on your personal circumstances and preferences, including tax implications.

For many Americans, Social Security is a critical source of income in retirement—offering guaranteed, inflation-adjusted monthly income for life. However, the age at which you decide to claim those benefits can make a big difference in how far they go to support your retirement income goals.

 

Maximizing your Social Security benefits requires that you factor in:

 

  • unknown information, such as your longevity and that of your spouse;
  • known information, such as your health status and level of retirement preparedness; and,
  • information about the possible contingencies that would most strain your finances.

 

In short, figuring this one out is actually quite complex. Here’s what you should know. 

Wealth Management

How to Think About Claiming Social Security

Deciding when to claim Social Security can have a significant effect on your retirement income. Learn how to help maximize your benefits.

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Delaying Social Security: Pros and Cons

For those born after 1960, the Social Security Administration defines full retirement age as 67 years old. However, benefits can be claimed as early as 62 or as late as 70, with certain penalties and inducements associated with early claiming or deferring of benefits—namely, a reduction or increase in the monthly benefit amount.

 

The size of these benefit adjustments is far from insignificant: Claiming at 62 reduces monthly benefits to just 70% of one’s full retirement-age benefit, while claiming at 70 increases it by 24%. Put another way, the monthly income provided when claiming at 70 is a sizable 77% higher than the income provided when claiming at 62.

 

Delaying benefits, however, means going years without income from Social Security. Among the more important drawbacks of this type of strategy is that it increases the strain on other parts of the retiree’s balance sheet used to sustain lifestyle expenses during those years.

Maximizing Your Benefits: Longevity Matters

Your expected longevity is among the most significant factors when deciding when to claim Social Security. Generally, the longer one’s life expectancy, the greater the benefit of delaying benefits when measured in cumulative benefits received. 

 

Of course, it isn’t possible to precisely predict your lifespan at the point when filing decisions must be made, but you can consider whether your health status and family history suggest heightened prospects of an extremely lengthy or short retirement.

 

Those who live past 77 will benefit from delaying benefits at least until their full retirement age (67), as that will result in greater cumulative income than claiming sooner. Based on recent actuarial tables, roughly three-quarters of people who are currently 65 will live to 77, and the fraction is higher for those in the highest deciles of wealth and educational background. Similarly, the age at which delaying claiming to 70 results in greater cumulative income than claiming at 67 is 81—about the average life expectancy for a single male today at 65. And of course, the benefits of delaying go up the longer past average life expectancy that you live. This is particularly important considering extended longevity scenarios are the most likely circumstances to put a retiree’s finances at risk.

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Generally, the longer one’s life expectancy, the greater the benefit of delaying benefits when measured in cumulative benefits received.

Balancing Income Sources

The flip side of the potential benefits associated with delaying Social Security is that you must rely more on other sources of income for the intervening period. The degree to which that is desirable will vary based on personal circumstances and preferences. For some, this might mean remaining longer in a job they find fulfilling. Not only would this provide income to sustain one’s lifestyle while deferring benefits, but it would also mean making additional Social Security contributions—and therefore potentially receiving even higher benefits when they are ultimately claimed.

 

Others may elect, or be forced, to retire earlier, potentially years before higher Social Security benefits are available. In this case, retirees will often need to make larger withdrawals on investment accounts to offset the deferred Social Security income. While this means foregoing market returns on the withdrawn savings, it’s often a good trade-off. Our analysis suggests that deferring Social Security claiming may offer the equivalent of a 6.3% annualized return1 (with no market risk), which is substantially more than the expected return for investment-grade bonds and even most equities, according to Morgan Stanley Wealth Management's Capital Market Assumptions. What’s more, unlike stocks and bonds, the growing benefits are inflation-adjusted for any cost-of-living increases in the interim. That can make an enormous impact on the value of deferral.

 

Accelerating withdrawals from an investment portfolio to sustain a strategy of deferring Social Security benefits comes with an important drawback known as “sequence-of-returns” risk: Withdrawing funds during a possible market drawdown reduces the ability of your portfolio to participate in any subsequent rebound, and the impact of locking in those losses can be most consequential if they occur during early retirement.

What Strategy Makes Sense for You?

Balancing these concerns must be done within the context of one’s holistic retirement strategy. For example, our analysis has found that your personal level of retirement preparedness can significantly influence whether deferring benefits is worth the additional sequence-of-returns risk it may entail. For less prepared investors, claiming Social Security earlier can help reduce sequence risk and any associated income shortfall that may occur later in retirement.

 

There is no single best answer for how to claim Social Security benefits. Rather, the right decision depends on your personal circumstances and preferences, including the impact of taxes. (As a general rule of thumb, planning a consistent level of taxable income across time can help save on tax expenses.) But regardless of the claiming strategy you choose, the most effective approach to retirement income will incorporate thoughtful financial planning and a holistic, tax-efficient view of all sources of funds. Connect with your Morgan Stanley Financial Advisor and tax advisor to discuss what strategy makes the most sense for you.

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Footnotes:

1 Compares benefits received when claiming at age 62 versus age 70, adjusted for life expectancy. Mortality probabilities based on that of 65-year-old woman. Inflation assumed to be 2.4%, in line with secular estimates from 2023 Annual Update of GIC Capital Market Assumptions. 

Risk Considerations

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

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