Retirees in the U.S. are evaluating whether to exhaust personal savings now to delay claiming Social Security benefits.
This decision is critical because the timing of benefit claims significantly alters the long-term growth of a retirement portfolio and the guaranteed monthly income provided by the government.
Financial experts suggest that the choice between spending down assets or taking early benefits depends on a balance of portfolio compounding and benefit maximization. Suze Orman said that one of the biggest decisions retirees make is when to file for Social Security benefits. She said that the decision can make a difference totaling tens of thousands, or even hundreds of thousands, of dollars [1].
For some, the strategy involves using cash reserves to cover living expenses in the early years of retirement. This approach allows the individual to wait until they reach the maximum benefit age, thereby increasing their monthly check for the rest of their life. However, this method requires a high tolerance for seeing a portfolio balance decrease in the short term.
Conversely, claiming benefits earlier can serve as a protective measure for investments. Orman said that by claiming earlier, a retiree could preserve more of their portfolio and allow those assets to continue compounding [1]. This strategy prioritizes the potential growth of the stock market over the guaranteed increase in Social Security payments.
Ultimately, the choice depends on the individual's health, current asset levels, and expected longevity. Those with substantial portfolios may find more value in compounding, while those with smaller savings may benefit more from the higher monthly payments associated with delayed filing.
“Your decision can make a difference totaling tens of thousands, or even hundreds of thousands, of dollars.”
The tension between portfolio compounding and Social Security maximization represents a hedge against two different risks: market volatility and longevity. By spending savings first, retirees bet on their own longevity to recoup the cost through higher monthly checks. By taking benefits early, they bet on the market's ability to grow their remaining assets faster than the government's benefit increase rate.
