Conventional financial planning wisdom suggests that clients with more substantial amounts of wealth may benefit by claiming Social Security early to help protect their portfolios and keep more of their money at work in the market during their retirement period.
However, as noted in a new video posted on the social media platform X by Jamie Hopkins, managing partner at Carson Group, recent research has largely debunked this rule of thumb, and there is a strong argument to be made that many — if not most — clients would be better off from both a legacy maximization and a risk mitigation perspective by delaying their benefits.
In the video, Hopkins cites an analysis published earlier this year in the Journal of Financial Planning by Wade Pfau and Steve Parrish. In the analysis, Pfau and Parrish use real historical return data to directly tackle the question of whether claiming benefits at age 62 leads to greater wealth at death compared to delaying Social Security benefits until age 67 or 70.
In crunching the numbers, the researchers find that delaying Social Security typically leads to higher amounts of wealth at death than claiming it at age 62, even for the wealthy, thereby refuting the claim that it is a good idea to start Social Security benefits early just to keep more dollars invested in the market.
According to the analysis, one key variable in the outcome of any given scenario being tested is the assumed allocation to stocks. Specifically, the early claiming strategy tended to fare better with higher stock allocations. Similarly and as expected, the results of the market-based approach are superior when stock market returns are strongest in the years between when the individual turned 62 and 70.
As Pfau and Parrish explain, the role of sequence of returns risk is key in the analysis. Those individuals who are lucky enough to experience strong returns early in their retirement years will end up with greater lifetime wealth, but the strategy is a risky one. As a purely logical exercise, Pfau and Parrish find, delayed claiming is the proven method for maximizing wealth.
Delaying Is the Safer Bet
As Hopkins points out, the percentage of cases where the legacy amount is greater when claiming at 67 or 70 compared to 62 ranged from about 60% to almost 97%.
"This is a really telling finding," Hopkins says. "The other thing I found really interesting was that delaying Social Security seems to help insulate clients against the worst-case scenario, in which you see the full amount of the client's private wealth depleted during the retirement period.
"What this shows me is that there are benefits to delaying on both ends of the analysis — in the wealth maximization effort and the risk minimization effort," he explained.
Hopkins says it is equally striking to see what it takes for claiming early to work better, "and it's a pretty narrow set of circumstances."
