The Wall Street Journal ran a blog post that outlined Michael Kitces’ argument for delaying Social Security which can be summed up by saying it should be thought of it as an asset in a portfolio so by waiting, the value of your asset grows. He also says that Social Security “’uniquely capable of hedging many risks in retirement that traditional portfolios cannot’—and he says it argues for ‘delaying benefits as long as possible.’”
The comments on the article, 32 at last look, were also interesting and offered several different perspectives. This is one of many things where there is no single right answer for everyone.
Arguments for taking it early include getting it now while you can before it becomes insolvent before benefits are somehow reduced as well as how long it would take to come out ahead by waiting (hint: it takes a while).
One of the reader comments made a very compelling point in favor of taking it early which was that portfolio growth is likely to exceed the COLA growth of Social Security. So by taking Social Security early you are presumably taking less from your portfolio thus giving more of the portfolio the opportunity to grow.
For this audience the discussion also needs to include how to take money out of the portfolio in coordination with Social Security. While we often discuss the 4% rule, and more recently whether the 4% still stands up, the reality will have more moving parts than simply taking 1% per quarter…or 82 basis points per quarter with the intent of never depleting your principal.
What types of accounts do you have your money allocated across and in what percentages? Types of accounts could include regular taxable accounts, traditional IRAs, 401k plans, HSAs, Roth IRAs and maybe some others and they all have different tax treatments. There are ways to manage what accounts you withdraw from such that you hopefully end up paying less in taxes or at the very least deferring taxes paid. While there are some rules of thumb it depends largely on your mix in whatever types of accounts you have.
Depending on your combination it very well could make the most sense, tax-wise, to deplete an account before tapping another. The idea of depleting one account entirely over some period of years while allowing others to grow untapped might be difficult to wrap your head around and obviously in the end you have to be comfortable with whatever withdrawal strategy you use but for most people it will not be simple.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.