[Editor's Note: Today's guest post about when to claim Social Security was submitted by David Graham, MD, a physician blogger, and advice-only financial planner. If you want the “TL;DR version” read the last paragraph. Because when all is said and done, the primary value of social security is as longevity insurance. So it's a bit like Pascal's Wager. If you live a long time, you'll be glad you waited to claim. If you die early, it doesn't matter because you won't run out of money anyway. Enjoy the post. We have no financial relationship.]
Almost 2 years ago, White Coat Investor hosted a Pro/Con post about when to take Social Security. Dr. Cory S. Fawcett argued to take Social Security at 62 years of age, and Dr. Dahle at age 70.
The scenario focused on a single high-income earner who retired at 62. Dr. Fawcett suggests taking Social Security early allows more spending early in retirement, or more time to invest. Dr. Dahle feels taking Social Security at 70 is superior as it guarantees returns, allows Roth conversions, and provides longevity insurance.
When Should You Take Social Security? 62 or 70?
So, who is right? Obviously, individual circumstances make all the difference, but let’s use professional financial planning software and run the numbers.
The good doctors agreed to use a $2M nest egg composed of 60% tax-deferred, 30% taxable, and 10% Roth. The index retiree draws on this nest egg starting at age 62. In general, it is most efficient to utilize the taxable account first, tax-deferred assets next, and tax-free assets last.
Beyond that, I have to make a few other assumptions. Spending is $90,000 a year—a 4.5% withdrawal rate on the portfolio. Additional medical expenses start at $5,000 a year and increase by 5% a year. Otherwise, inflation is 2% a year. The primary insurance amount (PIA—how much one gets from Social Security a month at full retirement age) is $2,800.
Stocks pay 7% (2% of which are dividends) and bonds 4%. Assume a 60/40 stock/bond portfolio, with the Roth 100% invested in stocks, and the other two accounts a mix of stocks and bonds to keep the overall asset allocation at target.
In addition, a $34,000 yearly distribution is taken from the IRA from age 62-69. This distribution increases 2% a year to keep up with inflation. An explanation for including this distribution is found near the end of this post.
With the above assumptions, taking Social Security at age 62 (henceforth called SS62) has Monte Carlo success odds of 62% vs 69% with delaying Social Security to 70 (SS70). These odds are slightly low, but I have chosen to model an aggressive withdrawal percentage from the portfolio.
Portfolio Value over 30 Years
Figure 1 (Portfolio value over 30 years)
As seen in figure 1, SS62 (light green) increases in value for about 20 years, and then slowly decreases to an end balance of $1.6M. In contrast, SS70 decreases in value until payments start at 70, then does better and finishes with $1.95M.
The cross over point—where SS70 is worth more than SS62—is 84 years of age (22 years after retirement). After 30 years, the SS70 portfolios is worth about $350,000 more than SS62.
Source of Retirement Income of SS62 and SS70
Figure 2 shows the source of income, which increases at 2% (5% for healthcare) to cover expenses. Purple represents Social Security income and orange withdrawals on the portfolio. Over the 30 year period, SS62 gets 20% of total income from Social Security, whereas SS70 gets 28%.
Withdrawal Percentage of SS62 and SS70
Seen above, SS62 starts at a 4.5% withdrawal rate and winds up over 10% after 30 years. SS70 has about a 5.5% initial withdrawal rate which then dips down at age 70, and slowly increases over time. Note the scale are slightly different, and SS70 winds up at about 7.5%, a lower rate than SS62.
What About Taxes in Retirement?
Taxes are an important issue to look at in retirement. Unlike in working years, retirees have amazing tax flexibility during retirement. The ability to control taxable income stems from the ability to withdrawal from different types of accounts.
In the current scenario, a Roth account grows in the background undisturbed. Instead, money primarily comes from Social Security and the brokerage account, in addition to distributions from the IRA prior to the age of 70, and required minimum distributions (RMDs) from the IRA after age 70.
Figure 4 shows the yearly taxes due with SS62 (light green) and SS70 (blue). Initially, SS70 pays less taxes (since part of the Social Security in SS62 is taxed) until RMDs force taxable income out of the IRA at age 70.
Taxes increase again for SS70 at age 79. Also, note that taxes increase for SS62 at age 82. Reviewing cash flow, this occurs when the brokerage account reaches zero and all income comes from the taxable IRA. Early claiming of Social Security kept the brokerage account around for 3 years longer in this scenario.
Overall—over the 30-year period—SS62 is actually more tax-efficient, saving about $7,000 or $250 a year in taxes.
What about Roth Conversions?
Partial Roth conversions are useful to convert pre-tax money (such as IRAs and 401k) into never-taxable money (Roth). Roth conversions force you pay taxes the year you convert, but then you never have to pay taxes on the conversions again. Frequently, partial Roth conversions can be useful to lower future RMDs and decrease the overall lifetime tax burden.
As seen above, green shows the taxable income, and the lines demonstrate the different tax brackets. Note the lower number (ie 10, 12, 22, and 24) are the current tax brackets with the Tax Cut and Job Act. This act expires in 2026 which results in the increased tax rates seen (10, 15, 25, 28).
From age 62-70, taxes remain in the 12% bracket. Staying in the 12% tax bracket keeps the dividends and capital gains rate at a favorable 0%. Income is obtained from a yearly taxable $34,000 distribution from the IRA, and from withdrawals from the brokerage account.
The pre-70 years of age distribution from the IRA is optimal for several reasons. First, without it, the brokerage account rapidly expires and forced taxes up into the 24% tax bracket. Second, by taking out pre-tax IRA funds, taxes stay in the 12% tax bracket until age 70. At that point, RMDs kick in and taxes increase from the 12% bracket into the 22% bracket.
In summary: the pre-70 age distributions decrease lifetime total taxes paid. I use $34,000 in this example, but unfortunately, the actual number needs to be calculated each year depending on other income.
Moreover, is it optimal to stay in the 12% bracket in this scenario, which makes partial Roth conversion tax-inefficient.
Income is not taken from the Roth account. This results in $1.2M in Roth funds after 30 years. Since more than half of the portfolio is left in Roth, aggressive partial Roth conversions are not indicated.
Often, when optimizing an individual retiree’s plan, a Roth funds some retirement expenses. This allows spending flexibility without increasing taxable income for the times taxable income needs to be below certain thresholds.
Taxes and Roth conversions are obviously complicated. While not mentioning other tax implications of retirement income planning, let’s briefly look at taxation of Social Security.
Taxation of Social Security
Your favorite Uncle taxes Social Security. In fact, when “combined income” is above $34,000 for a single filer ($44,000 for couples), up to 85% of Social Security is included in taxable income. To calculate combined income: take adjusted gross income + half of Social Security benefits + nontaxable interest (such as municipal bond coupons). Most high-income earners should assume they will have up to 85% of their Social Security taxed, as is the case for both SS62 and SS70.
Income from Social Security
Figure 6 (Total income over time from Social Security)
Over time, see the total absolute income from Social Security in figure 6. In grey, SS62 starts at 62 and has a flat slope. In blue, SS70 starts at 70 and the increased slope reflects its higher payment. At age 78, 16 years after retirement, you get more absolute income from SS70 than SS62.
Above, in figure 7, see yearly income from Social Security. SS62 is again in grey, and SS70 in Blue. SS62 starts at about $25k a year and increases to almost $50k after 30 years. With SS70, benefits start at $50k and increase to $76k after 22 years. In the end, there is $431k more absolute income taking Social Security at 70 than at 62 years of age.
What about Sequence of Return Risk?
Figure 8 (Effect of Sequence of Return Risk)
It is fun to look at sequence of return risk and consider Social Security claiming strategy. What if a 2000-2010 scenario happened just at retirement?
Above, you can see SS62 in light green initially does better than SS70 in blue. This is due to the fact that income from Social Security allows you to sell less equity when it is down due to a poor sequence of returns.
Due to the initial sizeable hit in the portfolio, however, neither makes it 30 years, though the SS70 shows its usefulness as longevity insurance.
A Quick Primer on Social Security
For those born after 1960, full retirement age is 67. You get your PIA (primary insurance amount) if you wait until your full retirement age.
If you claim after, you get 8% simple interest every year you delay until 70. So, you can get 24% more delaying Social Security 3 years beyond your full retirement age. Beyond 70 there are no additional increases, so it never makes sense to delay Social Security past 70.
If you claim early, you lose 5/9 of 1% for each month you claim early, up to 3 years. This is a 20% decrease in your PIA if you claim at 64.
You can claim as early as 62, in which case you get a 30% decrease in your PIA, or 5/12 of 1% for each month you claim early between 36 and 60 months.
To know when the right time to claim, you must know how long you are going to live. Since that is a guess, do you want a smaller benefit sooner or a larger benefit later?
My Thoughts About the Scenario and Assumptions Made
Social Security claiming strategy is complicated even for a single, well-to-do retiree. In this scenario, I selected a healthy withdrawal rate from the portfolio since Dr. Fawcett suggests that an early claiming strategy allows you to spend more earlier in retirement, or gives your investments time to grow.
In addition, some would suggest my return assumptions (7% for stocks and 4% for bonds) are too low. Perhaps it is better to plan conservatively and be happily surprised if everything works out better than planned.
As a side note, investing the relatively small amount you get from Social Security at 62 and expecting it to compound equivalent to the much larger benefit at 70 reminds me of savings rate in FIRE. For the 8 years you are investing Social Security returns with an early claiming strategy, there just is not enough money or time for higher return assumptions to make that much of a difference. To compound, you need time and a significant amount of money to start with. It is unlikely the “take it early and invest it” philosophy will be a winner over a guaranteed 24% higher payout.
What Did We Learn?
In absolute dollars received from Social Security, it takes 16 years to make more money with a delayed strategy, right at about $500,000 paid out (as per figure 6).
However, (as per figure 1) it takes 22 years for portfolio size to actually catch up. That is, the 8-year investing head start buys 6 extra years where portfolio size is larger due to claiming early.
Another way to say this, at least in this scenario, you have to live to about 85 to make a delayed claiming strategy make sense.
Take Less Social Security Now or More Later?
Don’t ignore Social Security in your future projections. It is clear Social Security will change over time but it is difficult to predict the future.
Your choice: take less now or more later? Even for a single, well-to-do physician, the decision is a difficult one.
It will take 16 years to catch up in absolute terms. If the money is invested, it takes 22 years. Do you plan to live that long after retirement?
Social Security, as it is indexed to a measure of inflation, is the best cost-of-life-adjusted annuity around. There is no annuity on the market nearly as good.
If you might live a while, a delayed claiming strategy makes sense. As money is fungible, you can spend other assets and postpone Social Security. The guaranteed return on investment is sweet. And if you die early, you won’t need the money anyway. But if you live a long and glamorous life, you might just be glad you waited.
When do you think is the right time to take Social Security? Do you plan on delaying or taking early? Comment below!