A new report from Vanguard examines who should claim Social Security benefits early.
The long-term solvency of Social Security is something that’s top of mind for many Americans these days.
The Social Security Administration (SSA) has stated that the asset reserves for the Old-Age and Survivor Insurance (OASI) Trust Fund, better known as Social Security, will become depleted in 2033. If that happens, and no policy changes are made to supplement the reserves, then Americans could see a reduction in benefits.
According to a recent paper from the Brookings Institution, only about 83% of scheduled benefits would be covered, resulting in a 17% reduction in benefits.
It further complicates the question of when you should start collecting benefits. Americans can start taking benefits at age 62, but they would be 30% less than they would be at the full retirement age, which for people born after 1960 is 67. You can wait as late as age 70 to start taking benefits, and if you do, you get 100% benefits plus some additional bonuses.
The conventional wisdom is to wait until at least your full retirement age to start claiming benefits, but a new report from Vanguard says tapping into Social Security early might be a good idea for certain people.
Who should take benefits early?
The Vanguard report, “Claiming Social Security Early: A Spectrum of Breakeven and Longevity Risks,” outlines four groups of people that may benefit from taking Social Security early. These groups, explained the report’s author, James Passman, wealth planning methodology analyst at Vanguard, are best positioned to start drawing Social Security checks as early as age 62 for various reasons.
Those four groups are:
- Ultra-high-net-worth individuals with plenty of wealth to fund expenses to near-perpetuity
- Those individuals who are projected to have shorter life expectancies.
- Retirees that have pensions that cover all of their spending needs.
- Minimal spenders, particularly those with consistent, predictable expenses.
“When someone is spending only a small portion of their portfolio, their concern should shift from outliving their assets—longevity risk— to passing earlier than anticipated, which creates a need to identify the Social Security benefit breakeven point,” said Passman. “For these people, the top priority might then become leaving as much as possible to a loved one or a cherished cause.”
Passman notes that those individuals that do claim early may be able to reduce the amount drawn from an investment portfolio, including a 401(k) or IRA. That way, they may be able to preserve assets for legacy bequests.
In addition, claiming early can spread the taxes owed over more years, thus reducing the relative tax burden.
“A claiming strategy is a highly personal decision, one that individuals should carefully consider based on their circumstances, lifestyle choices, and the understanding that their future needs and wants may differ from today’s,” the report states. “Financial modeling tools—like those used in consultation with a financial or tax advisor—can help someone grasp the most relevant trade-offs for their specific situation. This information can then be used to build out a comprehensive strategy that suits their needs.”
