The conventional wisdom to wait until age 70 isn’t always right
By how much do you think your investments will beat inflation over the course of your retirement?
As you think about your answer, you may find it useful to review the data in the table below. It reports the annualized returns over all 20-year periods since 1793 of two portfolios that are often used as proxies for the asset allocations of retirees’ portfolios. I chose to focus on a 20-year holding period since that is the average life expectancy of someone approaching retirement.
I calculated the table courtesy of data from Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University. The first portfolio has a constant 60% allocation to U.S. equities and a 40% allocation to U.S. bonds, while the second is even more conservative, with 40% in stocks and 60% in bonds.
|Average 20-year annualized real return||Worst 20-year annualized real return||Percent of 20-year periods in which annualized real return is below 2%|
|60% stock/40% bond||5.4%||-0.5%||9%|
|40% stock/60% bond||5.0%||-1.4%||11%|
The reason I included the right-most column is that, according to a study of the optimal age at which to claim Social Security, the threshold for claiming at age 66 instead of age 70 is whether your investments will beat inflation by an annualized average of 2% during your retirement.
I first wrote about this study four years ago for Retirement Weekly. The study’s author, Marvin Appel, editor of the Systems & Forecasts newsletter, recommended that near-retirees consider an approach he calls “claim and invest.” The strategy calls for retirees to claim their Social Security benefits at age 66 rather than age 70, and then invest those benefits. (Full disclosure: Appel’s newsletter is not one of those that utilizes my firm to audit its returns.)
Appel came up with a 2% real annualized return when calculating the rate of return necessary to make this retiree come out ahead relative to instead waiting until age 70 to claim his Social Security benefits. The data in the table certainly suggest that this 2% threshold is a fairly safe bet, assuming the future is like the past. The 60:40 portfolio beat that threshold in 91% of all 20-year holding periods since 1793, and the 40:60 portfolio did so 89% of the time.
To be sure, while these percentages are quite high, they aren’t 100%. So by following Appel’s “claim and invest” strategy you are making a gamble. Furthermore, given that both stocks and bonds are currently overvalued, your odds of losing that bet may be higher than what the historical data suggest.
But as you contemplate what is best for your particular situation, bear in mind that waiting until age 70 to claim Social Security also involves a gamble about how long you will live. Yes, Social Security guarantees that your monthly payment will be 32% higher if you wait until age 70 to claim, relative to what you would receive if claiming at age 66. But the earlier claimer will have pocketed four years of benefit payments by the time the later claimer begins receiving his, which means it will take a number of years for him to catch up.
When it comes to Social Security, however, there are numerous complicating factors. As always, be sure to consult with a qualified financial planner when considering your various options.
For example, if you’re married, your spouse is younger, and you had higher lifetime earnings than your spouse, then chances are it makes sense to wait until age 70 to claim your Social Security—no matter how much you believe your investments will beat inflation during your retirement. Even if you’re unmarried, furthermore, you still might want to wait until age 70 to claim if you’re in good health and confident you will outlive what the actuarial tables predict.
In any case, if you choose to “claim and invest,” make sure you are disciplined enough to not claim Social Security at an earlier age and, instead of investing it, go on a shopping spree.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.
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