A delayed Social Security filing can boost your monthly benefit income substantially. But did you know that a smart Social Security strategy also can boost the longevity of your portfolio?
My July column for Morningstar.com looked at an array of resources that can help individuals and couples optimize their benefits. That sparked a comment thread among Morningstar.com readers about the relationship between Social Security filing and portfolio longevity, with much of the discussion focused on an important 2012 article on the subject in the Journal of Financial Planning by William Reichenstein, a professor at Baylor University who has written extensively on Social Security planning, and William Meyer, a financial-services industry veteran.
Reichenstein and Meyer are the co-founders of SocialSecuritySolutions.com, one of the fee-based Social Security maximization services that I discussed in the July column. Their article concluded that a delayed filing–and using assets from your portfolio to fund living expenses in the early years of retirement–is an effective way to “buy” additional annuity income in the later years. And the increased annuity income lightens pressure on portfolios to such a great extent that portfolio life can be extended substantially. They concluded that portfolios ranging from $200,000 to $700,000 enjoyed the greatest life extension–anywhere from two to 10 years longer. The strategy works best for mass-affluent clients because Social Security represents a larger proportion of total net worth than it does for wealthier households.
I touched base recently with Reichenstein and Meyer to get their latest thinking on the subject. It turns out they’ve updated their research to look at an additional question: What happens to portfolio longevity when Social Security filing strategies are combined with tax-efficient withdrawal strategies?
What follows is an edited transcript of our conversation. Reichenstein and Meyer also have created a more detailed case study especially for Morningstar.com readers, which can be downloaded at no charge here as a PDF. You can also analyze your own numbers using a free online tool that SocialSecuritySolutions.com has created.
Q: Can you walk us through the basics of how delayed Social Security filing can extend portfolio life?
Bill Meyer: When people come in our door, many say they plan to file for Social Security when they turn 62, even though that’s most often not the best decision. Most of us have a behavioral bias to take Social Security right away, and people don’t really think about it as an asset. But it’s actually the largest asset most people have. Delaying your filing and winnowing down your savings to make up the shortfall in the early years of retirement makes a lot of sense.
Most financial plans use a 30-year life horizon from retirement. If your life is substantially shorter, you may do better filing earlier because the break-even point usually is around 80 years of age.
Bill Reichenstein: But this isn’t just about whether you live beyond 80. People are very concerned about not running out of money during their lifetimes.
Q: Perhaps people are starting to get the message about how delayed filing can have a direct impact on lifetime Social Security income. But I think many would be surprised to see how this can affect portfolio longevity. How does that work?
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