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Does delaying Social Security make sense?

Colleen Jaconetti

When's the "right" time to begin taking your Social Security benefits?

In the past, the decision has often been based on an analysis of your expected benefits versus your life expectancy. Vanguard research finds that this approach, however, ignores two key factors, namely: Once you start receiving it, it's paid for the rest of your life, no matter how long you live, and is adjusted upward for inflation.

The risk of outliving your savings

A big concern for most retirees is the risk of outliving your savings. For many retirees who can afford to do so, deferring Social Security for a few years (even past your full retirement age) greatly increases your lifetime monthly benefit. Full retirement age is defined by Social Security according to your birth year—with benefits maxing out at age 70. With life expectancies increasing, delaying Social Security can provide powerful longevity protection.

“Many investors underestimate the likelihood that they’ll be planning for a very long retirement. But it’s quite possible that decisions made around Social Security will have an impact on an individual or a surviving spouse for 30 years or more,” said Colleen Jaconetti, a senior investment analyst with Vanguard Investment Strategy Group.

If your financial situation allows you the flexibility to delay taking your Social Security benefits, it can make sense to do so.

“To the extent that an investor wants to increase guaranteed income in retirement, delaying Social Security is often the most cost-effective means of doing so,” Jaconetti said.

Why delaying could make sense

The act of delaying your claim is comparable to purchasing an inflation-protected deferred income annuity. Inflation-protected annuities are similar to regular immediate annuities, but payments are indexed to the rate of inflation. If you defer Social Security, benefits increase by up to 8% for every year that you delay claiming.

The chart below demonstrates how delaying Social Security can offer higher guaranteed income and provide longevity protection for you and your spouse. For instance, in the case of a married couple, if one delays claiming until age 70 (for maximum benefit), a surviving spouse receives the larger of the two Social Security benefits.

“Married couples, in particular, have a lot of options when it comes to Social Security, which can make for complex planning and tax decisions. An advisor can help evaluate the benefits and trade-offs of delaying Social Security, and how the decision will ultimately impact an investor’s financial goals in retirement,” Jaconneti said.

Delaying Social Security increases the benefits received

Before making a decision on when to begin taking Social Security, carefully review regulations and your own financial situation, and consider the state of your health. For individuals with poor health, or limited financial resources, an early Social Security claim may be necessary; however, for retirees who can wait, the increase in guaranteed income makes delaying a better option.

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