RETIREMENT INSIGHTS
Social Security timing and trade-offs
Maximizing total wealth over increasing life expectancies
THE CH O I CE IS CO M PLI C ATED. IN D ECID IN G W HEN TO CL AIM S O CIA L
S ECURIT Y B ENEFIT S , M EN A ND WO M EN WITH FIN A N CIA L FLE XIBILIT Y
AIM TO M A XIMIZE B OTH THE LIFE TIM E B ENEFIT S THE Y RECEIV E A ND
THEIR H O U S EH O LD W E A LTH . It’s not a simple calculation. Individuals receive higher
monthly benefits the longer they postpone claiming Social Security (up to age 70), but
waiting means they must forgo the income stream that Social Security benefits would
provide. As a result, they must tap into their investment portfolios and miss out on the
potential returns that those assets would have generated. For individuals who expect to
surpass the average life expectancy, waiting until age 70 to claim Social Security benefits
can maximize total benefits received. But does it also maximize long-term wealth?
As we said, it’s far from a simple calculation.
In this paper, we explore the trade-offs involved in claiming Social Security benefits. Our
study is informed by the ever-increasing average life expectancy for American men and
women, which has changed the calculus of retirement planning.
Within the context of this increasing longevity, we analyze the following three scenarios:
• maximizing an individual’s Social Security benefits using a standard break-even analysis
from J.P. Morgan’s Guide to Retirement
• maximizing total investible wealth using a deterministic analysis and assuming 5% and
7% average annual portfolio returns, net of fees
• maximizing median (or most common) and worst-case total investible wealth for two
portfolios with very different risk and return characteristics
SOCIAL SECURITY TIMING AND TRADE-OFFS
Our analysis assumes that individuals stop working at age 62
and try to choose when to claim benefits, by considering total
investible wealth over time. Therefore, our scenarios do not
consider the following: the earnings test, taxation of Social
Security benefits, filing strategies for couples and the implications of an individual’s claiming choice for a surviving spouse.
These factors are so varied that they warrant personalized
assessments based on unique client situations and are therefore beyond the scope of this study.
AMERICANS ARE LIVING LONGER
In 2014, a 65-year-old American man had an average life
expectancy of approximately 82.5 years; for a woman, the
average life expectancy was 85.2 years (EXHIBIT 1 ). Given continued advancements in medical treatments and technology,
one can reasonably estimate that median life expectancy may
extend to 86 or 87 years within the next several decades. The
Society of Actuaries recently cited 87.7 years as the median life
expectancy for the 10.5 million people covered by one of 123
private pension plans, a gain of 2.2 years in the past decade.
If you’re 65 today, the probability of living to a specific age
EXHIBIT 1: LIFE EXPECTANCY PROBABILITIES
100%
97%
Percent
85%
78%
80%
Women
Men
Couple (at least one lives
to specific age)
89%
73%
72%
54%
47%
42%
40%
33%
21%
20%
13%
19%
7%
0%
75 years
80 years
85 years
90 years
3% 1% 4%
95 years 100 years
Source: Social Security Administration and J.P. Morgan Asset Management; data as
of December 31, 2014.
Longevity is directly correlated to education level, income and
gender, but a family history of longevity is perhaps the single
greatest predictor of a person’s life span. Applying these demographic realities in the context of Social Security, we conclude
that healthy affluent people who have the financial flexibility to
choose from any of the Social Security claiming ages are likely
2
STANDARD “BREAK-EVEN” ANALYSIS FOR
SOCIAL SECURITY
Social Security is a program that pays individuals more the
later they claim benefits, with the advantage of delaying benefits ending at age 70 (EXHIBIT 2 , next page). Individuals born
between 1943 and 1954 receive 75% of their full benefit at age
62, 100% at the “full retirement age” of 66 and 132% at age
70. This represents a growth rate in income of 7.3% compounded over an eight-year period, from age 62 to 70. Note
that this is the rate at which the benefit itself grows before the
cost of living adjustment (COLA). COLA has averaged 2.43%
annually over the past 15 years, but the increases have been
smaller recently, with a 1.7% increase in benefits in 2015.
In determining how to maximize Social Security benefits, let’s
first look at a maximum wage earner—someone who has 35
years at or above the maximum wage base limit ($118,500 in
2015)—and determine the “break-even point.” This is the age at
which an individual will receive more from Social Security by
waiting for a larger benefit than he would have received if he
had claimed smaller benefits that began earlier in retirement
(EXHIBIT 3 ).
The current final break-even age of 80 is well below current
average life expectancy estimates: Actuarial tables project that
more than six in 10 men and more than seven in 10 women
who are age 65 are expected to live at least to age 80. For
married couples, there is an almost 90% chance that one
spouse will live to that age or beyond.
62%
60%
to have a higher chance of living to or beyond average life
expectancy. Therefore, we will use a target life expectancy of 87
when evaluating each of our three scenarios.
How should individuals evaluate these data as they decide
when to claim Social Security benefits? They should be aware
that they may favor claiming early due to “hyperbolic discounting,” a concept in behavioral finance that describes the preference for a dollar today rather than a dollar in the future.
Advisors who frame the decision within the context of a client’s
life expectancy, highlighting the key factors that will heavily
influence that life expectancy (including education level, family
history of longevity and current health status)—and anchoring
clients first on their age-70 benefit amount—can lead to a
more balanced evaluation of the claiming choice.
SOC IA L S EC U R IT Y T IMING AND TRADE-O F F S : M AXIM IZ ING TOT AL WE ALTH OVE R I N C RE ASI N G LI FE E XPE C TAN CI E S
SOCIAL SECURITY TIMING AND TRADE-OFFS
Deciding when to claim Social Security benefits is a critical retirement decision
EXHIBIT 2: SOCIAL SECURITY TIMING TRADE-OFFS FOR AMERICANS
Born 1943—1954
Age 61–72
Age 66
(Age 62)
(Age 70)
(Full Retirement Age)
Decreased benefits
75%
Increased benefits
100%
benefit
-6.25%
-6.25% average
average
per
per
year
year
132%
+8%per
per
year
+8%
year
7.3% compound growth rate for each year of waiting to take benefits
Born 1960+
Age 55 or younger
Age 67
(Age 62)
(Full Retirement Age)
Decreased benefits
70%
100%
benefit
-6.00% average per year
(Age 70)
Increased
benefits
124%
+8% per year
7.4% compound growth rate for each year of waiting to take benefits
2.43%
Average Cost of Living Adjustment (2000–2015)
1.7% Cost of Living Adjustment for 2015
Source: Social Security Administration, J.P. Morgan Asset Management. For illustrative purposes only. For 1955–1960, two months are added to the Full Retirement Age each year.
Maximizing Social Security benefits
EXHIBIT 3A: SOCIAL SECURITY BREAK-EVEN ANALYSIS—ESTIMATED TOTAL BENEFITS OF THE DISTRIBUTIONS BEGINNING AT A CERTAIN AGE ASSUMING
MAXIMUM BENEFIT
$1,200,000
$1,100,000
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Claim at age 70: $4,319 per month
Claim at age 66: $2,941 per month
Claim at age 62: $2,014 per month
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
EXHIBIT 3B: SOCIAL SECURITY BREAK-EVEN DATA
70
76
78
80
82
85
Claim at age 62
$239,514
$433,667
$505,595
$581,459
$661,475
$789,784
Claim at age 66
$186,262
$445,133
$541,036
$642,188
$748,876
$919,955
Claim at age 70
$51,828
$393,538
$520,130
$653,650
$794,479
$1,020,303
At age 65, probability
of living to at least age
91%
94%
75%
83%
69%
78%
62%
72%
54%
65%
42%
54%
Source: Break-even calculated using the Social Security Administration calculator for beginning values at each age. Assumes maximum benefits are received for individuals
turning 62 and 1 month, 66 and 70 in 2015 and assumes the benefit will increase each year based on the Social Security Administration 2014 Trustee’s Report “intermediate”
estimates (starting at 1.7% in 2015 and gradually rising to 2.7% in 2020). Monthly amounts without the cost of living adjustments (not shown on the chart) are: $2,014 at age 62;
$2,713 at age 66; and $3,606 at age 70.
J.P. MORGAN ASSE T MA N A G E ME N T
3
SOCIAL SECURITY TIMING AND TRADE-OFFS
The conclusion is clear when looking at Social Security in isolation: For individuals with a high likelihood of living beyond
average life expectancy and the goal of maximizing the
amount they receive from Social Security, waiting until age 70
to claim Social Security benefits will prove to be the best
choice over the long term.
ity of returns over time. Does protecting a portfolio early in
retirement by claiming lower monthly Social Security payments
sooner provide a better outcome than drawing from a portfolio in the initial retirement years and receiving higher benefit
payments? How aggressive might someone need to be to move
the break-even of claiming at age 70 out to our target life
expectancy of 87?
PORTFOLIO IMPLICATIONS OF SOCIAL SECURITY
CLAIMING AGES: A DETERMINISTIC VIEW
To conduct this assessment, all other factors remain constant.
In particular, total spending has to be the same across all
scenarios. We assume that spending is equal to the Social
Security benefit at age 62 ($24,170 annually) grown by the Social
Security Administration’s forecasted cost of living adjustment for
the program (1.7% in 2015, growing to 2.7% in 2020). We also
assume that a portfolio achieves an average annual return, net
of fees, of either 5% or 7%.
In reality, we know that the Social Security decision is not made
in isolation. Many people understand that deciding when to
claim Social Security benefits involves interconnected, interdependent choices. Individuals with the financial means to tap
portfolios to meet spending needs and thus postpone Social
Security benefits should evaluate the opportunity costs of doing
so. When will that opportunity cost be too high? Put another
way, when might someone be better off—in terms of maximizing
total investible wealth—claiming Social Security benefits earlier?
And at what point does that benefit dissipate?
We first assess this issue deterministically, assuming average
annual rates of return and ignoring the sequencing and volatil-
As we see it, a 5% return is likely a reasonable assumption
over the long run for a diversified portfolio. However, a 7%
return appears to be a very high hurdle, given lower expected
future returns across most asset classes. For example,
J.P. Morgan’s “2015 Long-term Capital Market Return
Assumptions”—our annual assessment of the long-term outlook
for all major asset classes and markets—assumes compound
Impact of Social Security claiming on portfolio values at 5% return
EXHIBIT 4A: SOCIAL SECURITY BREAK-EVEN ANALYSIS—ESTIMATED TOTAL VALUE OF ASSETS AND BENEFITS OF THE DISTRIBUTIONS BEGINNING AT A
CERTAIN AGE ASSUMING MAXIMUM BENEFITS AND SPENDING EQUAL TO SS VALUE CLAIMED AT 62
$2,500,000
Claim at age 70: $51,827 per year
$2,000,000
Claim at age 66: $35,294 per year
Claim at age 62: $24,169 per year
$1,500,000
Median life expectancy: 87
Claim at age 62 best option
66
70
$1,000,000
$500,000
$0
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
EXHIBIT 4B: RETAINED ASSETS AT SELECTED AGES BY SOCIAL SECURITY CLAIM AGE
70
80
83
85
90
Claim at age 62
$279,239
$454,851
$526,547
$580,518
$740,904
Claim at age 66
$189,188
$457,097
$573,851
$663,755
$938,959
Claim at age 70
$24,309
$372,125
$530,595
$654,384
$1,040,196
At age 65, probability
of living to at least age
62%
60%
42%
72%
62%
54%
Source: J.P. Morgan Asset Management. Assumptions: 2.7% COLA growth, $180,000 initial starting assets, required spending set to Social Security amount received when
claiming at age 62. For illustrative purposes only.
4
S OC IA L S EC U R IT Y T I M ING AND TRADE-O F F S : M AXIM IZ ING T OT AL WE ALTH OVE R I N C RE ASI N G LI FE E XPE C TAN CI E S
SOCIAL SECURITY TIMING AND TRADE-OFFS
returns of just 6.5% for U.S. large cap equities over the next 10
to 15 years. For U.S. investment-grade corporate debt, the
assumed compound return over that period is 4.75%.
pacing the strategy of protecting the portfolio early in retirement by claiming Social Security benefits sooner at reduced
amounts.
In the age 62 scenario, an individual claims benefits but does
not touch a portfolio to meet any spending needs. Note that
the Social Security benefit covers all spending needs through
retirement. As a result, the value of the portfolio continues to
increase at the average annual growth rate.
The 5% return scenario moves the break-even ages out to 80 (if
claiming between ages 62-66) and 85 (if claiming between ages
66-70) aligned to average life expectancy for men and perhaps
a little short for women (EXHIBIT 4), but still short of our target
life expectancy. The 7% return scenario successfully pushes the
break-even ages out to 84 to 91, but, as we have noted, with a
return assumption that is likely too aggressive (EXHIBIT 5).
In the age 66 and age 70 scenarios, the portfolio is initially
depleted at the rate of the age 62 benefit grown by inflation.
At these later claiming ages, the amount of the higher inflationadjusted benefit in excess of the age 62 benefit (the age 66
benefit is approximately $35,000 per year, and the age 70
benefit is about $52,000) is added back into the portfolio each
year. Specifically, when claiming at age 66, $8,824 extra is
received from Social Security and reinvested in the portfolio,
and when claiming at age 70, $21,917 is received and reinvested.
We then identify when the total value of the portfolios in the
age-66 and age-70 scenarios exceeds the age-62 scenario; in
other words, the age at which the same level of spending has
been supported but the total value of the portfolio begins out-
Note that claiming at age 66 is the best choice for the shortest
period of time for the more realistic scenario of 5% (from ages
79 to 85) because the much greater age 70 benefit quickly outpaces the age 66 claiming scenario. For people who anticipate
below-average life expectancy, claiming at 62 and protecting
their portfolios may be the best choice. But if greater life expectancy is anticipated either individually or as a couple, waiting
until age 66 has significant benefits in terms of getting to current average life expectancy. However, age-70 eventually outpaces the age-66 scenario and may result in greater lifetime
wealth, given anticipated growth in longevity.
Impact of Social Security claiming on portfolio values at 7% return
EXHIBIT 5A: SOCIAL SECURITY BREAK-EVEN ANALYSIS—ESTIMATED TOTAL VALUE OF ASSETS AND BENEFITS OF THE DISTRIBUTIONS BEGINNING AT A
CERTAIN AGE ASSUMING MAXIMUM BENEFITS AND SPENDING EQUAL TO SS VALUE CLAIMED AT 62
$4,000,000
Claim at age 70: $51,827 per year
$3,500,000
Claim at age 66: $35,294 per year
Claim at age 62: $24,169 per year
$3,000,000
$2,500,000
$2,000,000
Median life expectancy: 87
Claim at age 62 best option
66
70
$1,500,000
$1,000,000
$500,000
$0
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
EXHIBIT 5B: RETAINED ASSETS AT SELECTED AGES BY SOCIAL SECURITY CLAIM AGE
70
84
88
91
Claim at age 62
$330,923
$853,295
$1,118,496
$1,370,206
Claim at age 66
$223,053
$855,145
$1,193,167
$1,519,154
Claim at age 70
$45,072
$747,144
$1,140,662
$1,525,686
At age 65, probability
of living to at least age
46%
29%
18%
58%
41%
28%
Source: J.P. Morgan Asset Management. Assumptions: 2.7% COLA growth, $180,000 initial starting assets, required spending set to Social Security amount received when
claiming at age 62. For illustrative purposes only.
J.P. MORGAN ASSE T MA N A G E ME N T
5
SOCIAL SECURITY TIMING AND TRADE-OFFS
PORTFOLIO IMPLICATIONS OF SOCIAL SECURITY
CLAIMING AGES: A MONTE CARLO VIEW
We know that the average portfolio return achieved is never
exactly the same year in and year out. We know, too, that the
sequence in which the returns are actually experienced can have
a significant impact, particularly in the early years of retirement.
Our final analysis leverages a Monte Carlo approach to assess
the break-even question for two different portfolio allocation
assumptions. These assumptions have return expectations that
are similar to the prior deterministic analysis, but we now incorporate each portfolio’s corresponding volatility into the analysis.
Here we calculate the percentile likelihood of maximizing total
wealth in the most common scenario—the median case, which
has a 50% likelihood of occurring—and the worst-case scenario, which has a 5% likelihood. That is, 95% of scenarios will
result in higher wealth values.
• A conservative portfolio, with 30% in equities and 70% in
fixed income, an expected long-term return of 5.1% and
long-term volatility of 5.4%.
• A more diversified/aggressive portfolio with 55% in equities,
30% in bonds and 15% in alternatives (specifically, 25% U.S.
large cap, 10% U.S. small cap, 15% EAFE, 5% emerging market equity, 25% U.S. Barclays Aggregate bonds, 5% shortduration U.S. government credit, 5% diversified hedge
funds, 5% commodities, and 5% U.S. real estate investment
trusts); expected long-term return of 6.7% and long-term
volatility of 10.9%.
EXHIBIT 6 shows the estimated portfolio value at various ages
across Social Security claiming ages of 62, 66 and 70. For the
conservative portfolio (likely more commonly held by older
Americans), the break-even ages, assuming the median return
scenarios, are 80, 83 and 85, respectively, for the age-62,
age-66 and age-70 scenarios. Again, this is slightly below
target life expectancy.
Our key assumptions include the following:
• A $1 million portfolio
But look at the difference in total wealth in the later years of
retirement. As the conservative portfolio is depleted to keep
up with annual spending needs, there is almost $400,000 less
in forecasted wealth by the time an individual is in his early
90s (EXHIBIT 6). Therefore, the value of the benefit at age 70
in meeting lifestyle needs is clear when a more conservative
portfolio is the alternative funding option over the long term.
• Initial annual spending of $74,170. This assumes a 5% initial
withdrawal rate—that is, 5% of $1 million, or $50,000, every
year—plus the maximum age-62 Social Security benefit of
about $24,000, grown by 1.5% annually. (The 1.5% growth
rate is based on our insights into actual spending behavior
as people age. We recommend using a slightly lower
inflation rate on core spending.)
Maximizing Social Security benefits—Conservative portfolio, median case
EXHIBIT 6: 50TH PERCENTILE WEALTH VALUES AT GIVEN AGES BASED ON CLAIMING SOCIAL SECURITY AT 62, 66 AND 70*
$1,100,000
Claim at age 62
Claim at age 66
Claim at age 70
Median life expectancy: 87
$1,000,000
$900,000
$800,000
Ages 62—65
are estimated
$700,000
$600,000
$500,000
62
63
64
65
66
67
68 69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88 89 90
91
Source: J.P. Morgan Asset Management. Assumptions: Max earner; claiming at 62, 66 and 70; retires at age 62 in all scenarios. Invested (30/70) in large cap stocks and
aggregate bonds. Tax-exempt account. $74,170 spend in year 1 (5% of initial portfolio wealth + first year Social Security from claiming at age 62), grows at 1.50% each year.
Expected long-term return: 5.1%. Expected long-term volatility: 5.4%.
*Ages 62–65 are estimated.
6
S OC IA L S EC U R IT Y T I M ING AND TRADE- O F F S : M AXIM IZ ING TOT AL WE ALTH OVE R I N C RE ASI N G LI FE E XPE C TAN CI E S
SOCIAL SECURITY TIMING AND TRADE-OFFS
Maximizing Social Security benefits—Conservative portfolio, worst case
EXHIBIT 7: 5TH PERCENTILE WEALTH VALUES AT GIVEN AGES BASED ON CLAIMING SOCIAL SECURITY AT 62, 66 AND 70*
$1,200,000
Claim at age 62
Claim at age 66
Median life expectancy: 87
Claim at age 70
$1,000,000
$800,000
$600,000
Ages 62—65
are estimated
$400,000
$200,000
$0
62
63
64
65
66
67
68 69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88 89 90
91
Source: J.P. Morgan Asset Management. Assumptions: Max earner; claiming at 62, 66 and 70; retires at age 62 in all scenarios. Invested (30/70) in large cap stocks and
aggregate bonds. Tax-exempt account. $74,170 spend in year 1 (5% of initial portfolio wealth + first year Social Security from claiming at age 62), grows at 1.50% each year.
Expected long-term return: 5.1%. Expected long-term volatility: 5.4%.
*Ages 62–65 are estimated.
Consider as well the 5th percentile likelihood that an individual
in the age-62 scenario will run out of money by age 86. In scenarios with persistent poor markets, the higher Social Security
benefit taken later outpaces the advantage of using a lower
Social Security benefit to protect a portfolio from poor returns
early in retirement (EXHIBIT 7 ).
For the more diversified/aggressive portfolio, at age 87
we finally see the break-even between claiming at age 66 and
age 70 meet but not exceed target life expectancy. It is important to note that the total wealth values in the early 90s are
closer than in the conservative portfolio and are all moving
higher for both the age-66 and age-70 claiming scenarios. The
more diversified/aggressive portfolio is better able to keep up
with spending needs, regardless of the Social Security claiming
choice (EXHIBIT 8).
Maximizing Social Security benefits—Diversified portfolio, median case
EXHIBIT 8: 50TH PERCENTILE WEALTH VALUES AT GIVEN AGES BASED ON CLAIMING SOCIAL SECURITY AT 62, 66 AND 70*
$1,700,000
Claim at age 62
Claim at age 66
Median life expectancy: 87
Claim at age 70
$1,500,000
$1,300,000
$1,100,000
$900,000
$700,000
$500,000
Ages 62—65
are estimated
62
63
64
65
66
67
68 69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88 89 90
91
Source: J.P. Morgan Asset Management. Assumptions: Max earner; claiming at 62, 66 and 70; retires at age 62 in all scenarios. Invested 25% in U.S. large cap equity, 10% in
U.S. small cap equity, 15% in EAFE equity, 5% in EM equity, 25% in U.S. aggregate bonds, 5% in short duration gov’t credit, 5% in diversified hedge funds, 5% in commodities,
and 5% in U.S. REITs. Tax-exempt account. $74,710 spend in year 1 (5% of initial portfolio wealth + first year Social Security from claiming at age 62), grows at 1.50% each
year. Expected long-term return: 6.7%. Expected long-term volatility: 10.9%.
*Ages 62–65 are estimated.
J.P. MORGAN ASSE T MA N A G E ME N T
7
SOCIAL SECURITY TIMING AND TRADE-OFFS
Maximizing Social Security benefits—Diversified portfolio, worst case
EXHIBIT 9: 5TH PERCENTILE WEALTH VALUES AT GIVEN AGES BASED ON CLAIMING SOCIAL SECURITY AT 62, 66 AND 70*
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
Ages 62—65
$300,000
are estimated
$200,000
$100,000
$0
62 63 64 65
Claim at age 62
66
67
68 69
70
71
Claim at age 66
72
73
74
75
76
Median life expectancy: 87
Claim at age 70
77
78
79
80
81
82
83
84
85
86
87
88 89 90
91
Source: J.P. Morgan Asset Management. Assumptions: Max earner; claiming at 62, 66 and 70; retires at age 62 in all scenarios. Invested 25% in U.S. large cap equity, 10% in
U.S. small cap equity, 15% in EAFE equity, 5% in EM equity, 25% in U.S. aggregate bonds, 5% in short duration gov’t credit, 5% in diversified hedge funds, 5% in commodities,
and 5% in U.S. REITs. Tax-exempt account. $74,710 spend in year 1 (5% of initial portfolio wealth + first year Social Security from claiming at age 62), grows at 1.50% each
year. Expected long-term return: 6.7%. Expected long-term volatility: 10.9%.
*Ages 62–65 are estimated.
On the other hand, in all claiming scenarios, very poor market
returns early in retirement mean there is a 5th percentile likelihood of running out of money in all scenarios by age 85
(EXHIBIT 9).
CONCLUSION
As the average life expectancy for Americans continues to rise
steadily year after year, deciding when to claim Social Security
benefits becomes a more complicated choice. Our analysis
delivers the following important insights:
• For individuals who have a high likelihood of living past the
average life expectancy—most likely, people with longevity
in their family histories, higher levels of education and
income and healthier lifestyle choices—waiting until age 70
to claim Social Security benefits will in all probability produce both the greatest amount of total Social Security benefits and the greatest long-term wealth.
• An unrealistically high average annual return (7%) is
required to move the break-even meaningfully past age 87—a
realistic yet conservative estimate of average life expectancy,
assuming continued gains in longevity. Given the level of volatility associated with such a portfolio, it is unlikely that most
older Americans would remain invested to make this scenario behaviorally plausible. Also, there is a downside risk that
poor markets early in retirement will cause an individual to
run out of money well before age 90.
8
• Conservative investors can end with significantly less wealth if
they claim early and then surpass life expectancy. That is
because, given the conservative tilt of their portfolios, they
would have benefited even more later in life from the higher
Social Security benefit amounts that they would have received
had they delayed their first Social Security benefit checks.
• If an individual has a below-average life expectancy, age 62
will likely be the optimal claiming age. This can be seen in a
traditional break-even analysis, a 5% deterministic analysis
and a portfolio of 30% equities/70% fixed income.
Deciding when to claim Social Security benefits has never been
a simple exercise. By definition, a wide range of variables and
choices needs to be considered; trade-offs and opportunity
costs must be taken into account. The exercise has become
even more complex given the ever-increasing average life
expectancy for American men and women.
The analysis we have presented in this paper—in particular,
the step-by-step examination of three different claiming and
investing scenarios—should provide financial advisors with
deeper insights into the claiming decision. They can draw on
those insights in the context of a client’s broader investment
picture and potential life expectancy. As always, advisors will
provide the most effective financial advice when they consider
the unique personal circumstances of their clients when
choosing when to claim Social Security.
SO C IA L S EC U R IT Y T I M ING AND TRADE- O F F S : M AXIM IZ ING T OT AL WE ALTH OVE R I N C RE ASI N G LI FE E XPE C TAN CI E S
SOCIAL SECURITY TIMING AND TRADE-OFFS
Special thanks to the JPMorgan Private Bank’s Advice Lab for its
expertise and to the Private Bank’s Portfolio Construction Group
for the use of its proprietary asset projection system for our
Monte Carlo analysis.
ABOUT THE AUTHOR
S. Katherine Roy, CFP®, is Chief
Retirement Strategist and Head
of Individual Retirement at
J.P. Morgan Asset Management
in New York, where she develops
leading insights, strategies
and solutions to help financial
S. Katherine Roy, CFP® advisors successfully partner with
individuals in the transition and
distribution life stages. She earned a BA from Yale University.
Contact her at [email protected].
J.P. MORGAN ASSE T MA N A G E ME N T
9
RETIREMENT INSIGHTS
J.P. M O RG AN ASS ET M A NAGEME NT
270 Park Avenue I New York, NY 10017
Sources: 2014 Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds Report and Social Security Administration, www.ssa.gov, as of September 2014.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or
tax advice.
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Copyright © 2015 JPMorgan Chase & Co.
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