When should one begin taking Social Security?

Most advisers know to tell clients to hold off, but many clients object to that recommendation until the decision is framed very differently. Advisers can tell them to spend money now and still let it grow.

Take this recent case, for example.

Sue is 66 and eligible to receive her $26,244 annual Social Security benefit now or 32% more if she waits four more years. If inflation averages 2% annually, which is the Federal Reserve’s target, then Sue will be giving up $108,167.

That is a lot of money. But if she waits, she will get an additional $9,090 income annually, and that will increase with inflation.

Even though she is in good health, Sue is reluctant to wait and wants to enjoy the money now.

I tell her to think about it differently in that she can do both. This is reframing the decision.

Although she would be technically waiting, I tell her to take the $26,244 annually from her portfolio to live on and have some fun.

What she is actually doing is buying what is called an inflation-adjusted deferred income annuity. It gives money for life and lowers the probability that she will run out of money if she lives a long life, which is known as longevity insurance.

Not only is Sue really buying this annuity, she is buying it at a bargain price. I priced such an inflation-adjusted deferred income annuity paying $9,090 annually, increasing with inflation, and the best price I could find from the highest-rated insurance company was $162,825.

So giving up $108,167 was actually buying the income at nearly a 34% discount.

Clients can have their cake and eat it, too.

Clients can enjoy their money now by spending down their portfolio at a faster rate while deferring Social Security, which is buying a deferred income annuity at a bargain price. In doing so, an adviser can lower the probability that the client will run out of money.

This reframing is also supported by academic research from the Stanford Center of Longevity.

Recent papers support delaying Social Security benefits, and co-author Steve Vernon said that the work “confirms the desirability of the strategy to use retirement savings to delay starting Social Security.”

So help clients reframe the Social Security decision and reduce the risk of outliving their savings.

This story is part of a 30-30 series on preparing for retirement.

Allan S. Roth

Allan S. Roth

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for AARP and has taught investing at three universities.