For Social Security Planning- Both the Tortoise and the Hare Can Win

February 5th, 2021 by Jim Allen

One of the major financial decisions people nearing retirement must make is when to turn on their Social Security benefits. There isn’t one set age like there is for Medicare, and a person can select any time between age 62 and age 70. Some people will take the “Hare” approach and take benefits as early as possible, while others may take the “Tortoise” approach and delay taking benefits while betting that they will receive more over the long run.

If you start benefits at age 62 or any time before your full retirement age (which is age 66-67), your monthly benefit is permanently reduced by as much as 30%. The reason for this is that the Social Security Administration has a formula for calculating how much in lifetime benefits you should receive based on your earnings history. So, you are entitled to a finite amount of benefits that doesn’t increase just because you started benefits early. Instead, they reduce your benefits so that you will be paid about the same amount of money over your life, but stretched over a longer period of time. This works very much like a 30-year mortgage only in reverse. With a 30-year mortgage, your monthly payments are calculated based on paying it back over 30 years. This results in a lower payment than say a 15-year mortgage where the same amount must be paid over only 15 years. So, starting your benefits 4-5 years earlier lowers your monthly benefit since you will receive the same lifetime benefit over a longer period.

On the other hand, if you take your benefits later, you receive an 8% per year increase in benefits (up to age 70) over what your full retirement age benefit would be. Think of this as the 15-year mortgage where you are going to receive the same lifetime amount but over a shorter period. By delaying starting benefits until age 70, you will receive anywhere between 24% to 32% larger monthly payments.

Which of these approaches is better? With the Hare approach you are betting that taking benefits as early as possible will result in more because you are going to see 4-5 years of additional payments (though at a reduced rate). In addition, some people take the Hare approach because they have a concern that Social Security benefits may be eliminated or reduced in the future and want to make sure they get what they are entitled to. With the Tortoise approach, you are betting that even though you may receive fewer payments, the increased benefits will make up for the delay in the long run.

The key to which approach works better is primarily a function of how long you are going to live. The problem is that nobody knows this. If you are aware that your life expectancy is shortened due to health issues, then the Hare approach might make sense. But, if you expect to live to a ripe old age, the Tortoise approach will likely give you substantially more in lifetime benefits. We have seen cases where delaying starting benefits can result in over $100,000 of additional Social Security income over a lifetime. Generally, the crossover age where you will see more in benefits by delaying is about 78 years old.

While life expectancy is a major factor in determining which approach is better, it is not the only one. We also need to consider the following factors:

  • How important are Social Security survivor benefits if a spouse passes away?
  • If you want to retire early but delay benefits, what other investments do we have to “bridge” the delay in Social Security payments?
  • Would delaying Social Security cause you to use up your other assets sooner?
  • For married couples, can we take one benefit early and delay the other?
  • Which approach best helps you increase your probability of success in retirement?

Based on our extensive experience helping retirees for over 30 years, both approaches can and do work. It all boils down to your individual situation and your spending needs, your assets, family longevity etc. That is why we perform a detailed Social Security claiming analysis for every pre-retiree we are providing financial planning for. Both the Tortoise and Hare can win, it just depends on which way is best for you to run the race of retirement.

If you would like more information, we are presenting a webinar on “Maximizing Social Security Benefits” on Wed., Feb 17th at 6 pm. Please see our website for registration information.

Jim Allen, CFP, ChFC, CDFA, EA is the Director of Financial Planning and a Principal at Anchor Bay Capital. In addition to his 30 years of financial planning experience and his professional credentials, he holds a master’s degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning” and is an Enrolled Agent admitted to practice before the IRS.  Jim can be reached at [email protected]