How Your Social Security Claiming Age Influences Asset Allocation
A couple in their mid-60s recently asked me when the best time would be to take Social Security. After discussing their financial situation and family longevity history, we settled on a preliminary plan that involved waiting on Social Security for a few years. The plan was to lean more heavily on their investments and dial back withdrawals once Social Security began. Because of this, we made some modest adjustments to their asset allocation to accommodate this. We wanted to ensure we had enough funds in conservative investments to cover these larger withdrawals while they waited for Social Security to begin.
Consider the following example.
Jim and Jane are 64 and retiring this year.
• They need $120,000/yr for spending.
• They have $1,500,000 in investments.
• They are considering taking Social Security immediately ($58,792/yr total) or waiting until 70 to allow benefits to grow.
This is how their annual cash flows will look under those two options –
Take Social Security @ 64
Wait until 70
Their investment mix will vary if they want 5 years of withdrawals in conservative funds.
If they take it immediately, they will need $285,000 from investments over the next 5 years.
If they wait until age 70, they will need $600,000 from investments over the next 5 years.
This allocation could change as time goes on. Since age 70 provides a larger monthly benefit, they don’t need as much from investments.
Ex) 2032-2036 (age 71-75)
If they take it immediately, they will need $250,000 from investments between 2032-2036.
If they wait until age 70, they will only need $50,000 from investments between 2032-2036 because of the substantially larger Social Security benefits.
Based on their goals and risk tolerance, if they waited until 70 to take Social Security, they were more conservative early (60% stocks, 40% conservative vs. 81% stocks, 19% conservative funds) but then more aggressive later as they had very little need for the investments (97% stocks, 3% conservative vs. 83% stocks, 17% conservative).
While everyone’s risk tolerance is different, the idea is consistent—if you need more or less from your investments because your Social Security benefits are being delayed or taken early, it can substantially impact your risk capacity, which is the amount of risk you can afford to take.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.