Should You Claim Social Security

Should You Claim Social Security at 67 or 70? The Answer Isn't What You Think.

By Robert Fertman, Bryn Mawr Wealth Management LLC The decision of when to claim Social Security is one of the most significant financial choices you'll make for retirement. For most people, full retirement age is 67. The common advice, often repeated by so-called experts, is to wait until age 70 to collect a higher guaranteed benefit. However, a deeper analysis reveals that this is often not the best advice. If you don't need the income immediately, it can be more advantageous to claim your benefits at age 67 and invest the funds. This strategy allows you to build a substantial retirement asset that offers both flexibility and growth potential, which may ultimately provide greater long-term wealth than the larger check from waiting. This analysis will explore the two paths: claiming at 67 versus delaying until 70, helping you understand the trade-offs to make a more informed decision.

Understanding How Your Benefit Is Calculated

The Social Security Administration (SSA) determines your benefit based on your lifetime earnings

and the age you start collecting.

1. Average Indexed Monthly Earnings (AIME): The SSA indexes your earnings history to account for changes in wage levels over time and calculates an average from your 35 highest-earning years. If you have fewer than 35 years of work, zeros are used for the missing years, lowering your average.

2. Primary Insurance Amount (PIA): This AIME is then used in a formula to determine your PIA, which is the full benefit you are entitled to at your full retirement age (currently 67 for most).

3. Annual Recalculation: A crucial and often overlooked point is that if you continue to work while receiving benefits, the SSA automatically recalculates your benefit each year. If a recent year of work is among your top 35 earning years, it replaces a lower-earning year, increasing your AIME and, consequently, your monthly benefit.

The Three Scenarios for Claiming Benefits

Your actual monthly payment is adjusted based on when you decide to claim:

Claiming Early (Age 62): You can start as early as 62, but your benefit is permanently reduced by about 30%. Furthermore, your benefits can be significantly penalized if you earn income above a certain limit, making this the least attractive option for most.
Claiming at Full Retirement Age (FRA - Age 67): You receive 100% of your Primary Insurance Amount (PIA).
Delaying Your Claim (Age 70): For each year you delay past your FRA, your benefit increases by a guaranteed 8%. By waiting until 70, you receive 124% of your PIA for the rest of your life.

The central question is whether to accept this guaranteed 24% increase or to take the benefit at 67 and potentially earn a greater return by investing it yourself.

The Power of Investing: A Tale of Two Choices

Let's analyze the opportunity cost—what you give up by choosing one path over the other. To illustrate, we'll use a hypothetical scenario where your full retirement benefit (PIA) at age 67 is $3,000 per month.

Scenario 1: Claim at 67 and Invest. You begin collecting $3,000 per month ($36,000 per year) at age 67. Instead of spending it, you invest it. Assuming a hypothetical 10% annual return:

By age 70, after investing for three years, your initial $108,000 in contributions would grow to approximately $125,345.

This portfolio is now a significant asset. You could begin withdrawing $720 per month from it to match the higher benefit you would have received by waiting until age 70 ($3,000 from Social Security + $720 from investments = $3,720).

Even with these withdrawals, the remaining principal continues to compound. Assuming the same 10% return, your investment portfolio would not only last but grow substantially.

By age 84 (the approximate life expectancy for a 70-year-old man), it could be worth over $243,000. If you lived to 100, that same portfolio could be worth over $858,000.

Under this scenario, the combination of your Social Security income and investment growth provides significantly more lifetime wealth and leaves a substantial inheritance.

Scenario 2: Wait Until Age 70.

You forgo three years of payments. At age 70, you begin collecting a guaranteed, inflation-adjusted benefit of $3,720 per month (124% of your $3,000 PIA). This is a secure, risk-free income stream. If you lived to age 100, you would have collected a total of $1,339,200. While substantial, this amount is significantly less than the potential total wealth generated in Scenario 1. The Break-Even Analysis: When Does Waiting Pay Off? To understand the conventional wisdom, let's first analyze the decision without considering any investment returns.

The Head Start: The person who claims at 67 receives $108,000 ($3,000 x 36 months) by the time they turn 70.

Catching Up: The person who waits until 70 receives an extra $720 per month. To catch up to the $108,000 head start, they would need 150 months ($108,000 ÷ $720), or 12.5 years.

The Break-Even Age: The break-even age is therefore 82 and a half.

If you pass away before age 82.5, you are financially better off claiming at 67. If you live longer, waiting is superior—assuming you don't invest the money.

This calculation is the basis for most recommendations to delay. Since the average life expectancy for a 67-year-old is beyond 82.5, waiting seems logical. However, this simple analysis ignores the most powerful force in finance: compounding returns. When you factor in investment growth, the break-even point shifts dramatically. In fact, with a consistent return, the "catch-up" may never happen.

To simply break even by age 100, the person claiming at 67 would only need to achieve an approximate 6.14% annual return on their investments. Any return higher than that makes claiming at 67 the superior financial choice.

Redefining the Decision: Risk, Control, and Opportunity

The choice is not just about a break-even age; it's a strategic decision about risk and control.

The Opportunity Cost of Waiting Until 70:

You forgo creating a large, flexible investment asset.
You forgo creating a large, flexible investment asset.you are confident you can earn more in the market, this is a suboptimal choice.
You leave your money in the government's possession, exposing it to potential future benefit cuts. A dollar in your investment account is more secure than a dollar promised by a future government.

The Opportunity Cost of Claiming at 67:

You forfeit a risk-free, inflation-adjusted, 24% increase in your lifetime government pension.
You accept market risk. If your investments significantly underperform, you could end up with both a smaller Social Security check and a depleted portfolio.

Conclusion: Your Decision Depends on You

The common advice to delay Social Security until age 70 is based on an incomplete calculation that ignores the power of investing. For those who don't need the income to live on, claiming at 67 and investing the benefits can lead to substantially greater lifetime wealth, flexibility, and a larger inheritance. The optimal choice depends on your personal circumstances:

Risk Tolerance: Are you comfortable with market fluctuations, or do you prefer the certainty of a guaranteed, higher payment?
Financial Situation: Do you have other assets to live on between ages 67 and 70?
Health and Longevity: While impossible to predict, your family history and personal health are important factors.

This decision is too important to be based on simplistic rules of thumb. By carefully considering the opportunity costs and running the numbers for your own situation, you can make a choice that aligns with your financial goals and provides peace of mind for your retirement.

For a free consultation of your particular situation, please contact:

Robert Fertman

Bryn Mawr Wealth Management, LLC

Email: rfertman@brynmawrwealth.com

Phone: 610-527-3050