A conventional wisdom has developed, among those who study the matter, that waiting to claim benefits is the better course for those deciding when to start receiving social security. There has been some pushback, though, and lately a spate of articles has urged people to consider claiming early. For example, this one suggests that “smart people” take social security benefits early.
Those espousing the conventional wisdom are even more right than they know. Unless necessary to avoid eating dog food, or otherwise climb out of immediate poverty, one should do everything within her power to avoid reducing the benefit amount by claiming early. The wisest course is to hold off until the maximum benefit is achieved (which, under current law, usually means waiting until age 70). It may seem tempting to begin taking as soon as possible, in the hope of accumulating more money, but it is deeply imprudent.
Consider the two basic claiming options (claim early vs. claim late) along with the two basic possibilities for your longevity (die early vs. die late). To analyze this most effectively, you should make a chart like the one below. I am deeply indebted to my old Professor, Thomas Schelling for teaching me and my classmates how to do this.
| Die Early | Die Late | ||
| Take Early | |||
| Take Late |
The four possibilities create the four boxes of the matrix. Each box, in turn, allows us to examine one of the four possible outcomes. Let’s fill them in to indicate whether we would do well or poorly if that scenario came to pass:
| Die Early | Die Late | ||
| Take Early | Win | Lose | |
| Take Late | Lose | Win |
It seems that both claiming early or late offer a chance to win and a chance to lose. It all depends on when you die. None of us knows in advance the date of our demise so, it might seem, either way our odds of obtaining the better outcome are mixed. If this were really the case, it might make sense to seize our calculators and begin figuring out which way yields a few more dollars.
That analysis, though, is the equivalent of staring so hard at the trees that one fails to notice the forest. For there is a glaring issue staring out at you from the matrix above. Something you forgot to notice. If you die early, your delight in having chosen the higher paying path will be severely constrained. YOU WILL NOT CARE BECAUSE YOU WILL BE DEAD. In similar fashion, if you make the “losing” choice of taking late but actually dying early, your tendency to second-guess will be minimized by the fact that you are already dead.
The decision matrix tool helps us see more clearly that the two scenarios involving early death cannot be given the same weight as those concerned with greater longevity. If you simply cross out the “die early” boxes, the decision becomes remarkably simple. Take early and you lose; take later and you win.
So, while the choices surrounding claiming social security benefits have been called a “major life decision,” the strategy turns out to be simple. Wait to claim. Increase your benefits to their maximum. And may you enjoy that extra money over a long and healthy lifetime.