This is the third post in a short series on Social Security claiming decisions.
In the first post, we looked at why delaying Social Security is not just a math problem. In the second post, we discussed why the Social Security break-even age can be misleading.
Now let’s look at another way to think about Social Security:
Delaying Social Security can act as a hedge against some of the biggest risks facing a retirement portfolio.
That may sound unusual at first. Most people do not think of Social Security as a hedge. They think of it as a monthly check.
But Social Security has several features that are difficult to duplicate with a personal investment portfolio. It pays for life. It includes cost-of-living adjustments. It is not directly tied to stock or bond market performance. And for married couples, the claiming decision may affect the benefit available to a surviving spouse.
Those features can become especially valuable when the rest of the retirement plan is under pressure.
The Same Risks That Hurt Portfolios Can Make Social Security More Valuable
Retirees face several risks that can make a portfolio harder to manage.
They may live longer than expected. Inflation may be higher than expected. Investment returns may be lower than expected. A market downturn may occur early in retirement. A surviving spouse may need to maintain income after one Social Security benefit disappears.
These are difficult conditions for a retirement portfolio.
A longer retirement means the portfolio must support more years of withdrawals. Inflation means future withdrawals may need to be larger. Lower investment returns mean the portfolio may not grow enough to offset those withdrawals. A poor market early in retirement can be especially damaging because withdrawals continue even when account values are down.
This is the challenge of retirement income planning. The portfolio is not just trying to grow. It is also being used to fund spending.
Social Security works differently.
It continues for life, even if you live well beyond average life expectancy. It includes cost-of-living adjustments. And the monthly benefit is not reduced because the stock market had a bad decade.
That is why delaying Social Security can serve as a form of portfolio hedge.
The value of delaying may be greatest when the portfolio needs the most help.
Social Security Is Not Designed to Beat the Market
A common argument for claiming Social Security early is that the retiree could invest the benefits.
That can work in some situations. If markets perform very well, especially early in retirement, claiming early and investing the money may produce a favorable result.
But that argument often overlooks several realities.
First, the retiree may not be investing the full Social Security benefit. Depending on the retiree’s tax situation, a portion of Social Security may be taxable. That means the amount available to invest may be the after-tax benefit, not the gross benefit.
Second, the investments must do more than simply earn a positive return. They must earn enough, after taxes and risk, to make up for the permanently lower Social Security benefit.
Third, the strategy must work during the actual market sequence the retiree experiences. Retirement does not happen in averages. It happens in real years, with real withdrawals, real taxes, and real market volatility.
Finally, many retirees are not willing or able to invest aggressively enough to make the strategy work. A retiree who is depending on a portfolio for spending may not be comfortable investing as if the money is purely long-term growth capital.
Social Security is not designed to beat the market.
It is designed to survive the market.
We will look at this argument in more detail in next week’s blog, because “claim early and invest it” is one of the most common—and most misunderstood—Social Security claiming strategies.
Why Retirement Timing Matters
One of the most overlooked risks in retirement is timing.
Two people can retire with the same amount of money, the same spending needs, and the same investment allocation, but experience very different outcomes depending on when they retire.
Someone who retires into a strong market may have a much easier time sustaining withdrawals. Someone who retires just before a bear market or inflationary period may face a much harder path.
The difficult part is that retirement timing is often not fully within a person’s control. It may be dictated by birth year, health, job changes, caregiving responsibilities, employer decisions, or simply the point at which continuing to work is no longer practical.
In other words, many people do not get to choose the perfect market environment for retirement.
That matters because portfolios are sensitive to the sequence of returns. Poor returns early in retirement can do more damage than poor returns later, especially when withdrawals are being taken from the portfolio.
Social Security is different. It does not depend on whether you retired into a bull market or a bear market. It does not decline because the market was down when you needed income.
Delaying Social Security can help increase the portion of retirement income that is not dependent on market timing.
The Loss of Pensions Makes Social Security More Important
For many prior generations, retirement income was often described as a three-legged stool: Social Security, a pension, and personal savings.
The idea was that no single leg had to carry the entire weight of retirement. Social Security and pensions provided lifetime income, while personal savings provided flexibility, growth potential, liquidity, and a possible legacy.
Today, many retirees no longer have that traditional pension leg. For them, the stool may have only two legs: Social Security and personal savings. It is much harder to maintain balance on a two-legged stool.
That changes the planning equation. Without a pension, more responsibility falls on the portfolio. The retiree must decide how much to withdraw, how to invest, how to handle market downturns, how to manage inflation, and how to avoid running out of money.
When pensions disappear, Social Security becomes more important, not less.
For many households, Social Security may be the only meaningful source of lifetime, inflation-adjusted income. Delaying it can make that income stream larger and reduce the burden placed on the portfolio later in retirement.
Why Delaying Can Be More Valuable Today
Social Security’s delayed retirement credits were designed decades ago, when the retirement landscape looked different.
At the time, life expectancies were generally shorter, interest rates were higher, and more retirees had traditional pensions. Under those assumptions, the increase for waiting to claim Social Security was intended to be roughly actuarially fair.
Today, the planning environment has changed.
Many retirees may live well into their 80s, 90s, or beyond. Fewer retirees have traditional pensions. More retirement income must come from investment portfolios, which are subject to market risk, inflation risk, and withdrawal risk.
That can make the reward for delaying Social Security especially attractive for healthy retirees who can afford to wait.
A larger Social Security benefit is not just more income. It is more lifetime income. It is also income that includes cost-of-living adjustments and does not depend on market performance.
In a world where many retirees may live longer and rely more heavily on their investment portfolios, a permanently larger inflation-adjusted Social Security benefit can be a powerful planning asset.
The Larger Benefit Can Matter Most Later
The case for delaying Social Security is often strongest in the later years of retirement.
Early in retirement, retirees may have more flexibility. They may be healthier, more active, and better able to adjust spending. They may also have more investment assets available.
Later in retirement, the situation may look different.
The portfolio may have been reduced by years of withdrawals. Health care costs may be higher. Inflation may have increased the cost of living. One spouse may have died. The surviving spouse may be managing expenses with one Social Security check instead of two.
In those later years, a larger Social Security benefit can provide valuable stability.
That is why delaying Social Security is not simply a bet on living longer. It is a way to create a stronger income floor for the years when financial flexibility may be lower.
What the Research Suggests
Retirement income researchers Wade Pfau and Steve Parrish1 found that delayed claiming often improved historical retirement outcomes, especially when market results were less favorable.
That finding is important because it supports the idea of delayed Social Security as a risk-management tool. Retirees are not only trying to maximize wealth in the best-case scenario. They are also trying to protect against the possibility that retirement does not go according to plan.
In other words, delaying Social Security may be less about chasing the highest possible return and more about improving the durability of the overall retirement income plan.
Delaying Is Not Always the Right Answer
None of this means that everyone should wait until age 70.
Claiming earlier can make sense for people with serious health concerns, shorter life expectancy, immediate income needs, limited assets, or other planning priorities.
The goal is not to delay Social Security for its own sake.
The goal is to coordinate Social Security with the rest of the retirement income plan.
For some retirees, claiming early may be appropriate. For others, delaying may reduce risk, increase future income, protect a surviving spouse, and make the overall plan more durable.
A Better Way to View the Decision
The Social Security claiming decision is often framed as a choice between getting money now or getting more money later.
That is part of the story, but it is not the whole story.
A better question is: How much of my retirement income should depend on my portfolio, and how much should come from sources designed to last for life?
That question is especially important in a world where fewer retirees have pensions and more retirement income must come from investment accounts.
A portfolio can be a powerful retirement tool. It can provide growth, flexibility, liquidity, and legacy value.
But a portfolio is not a pension.
Social Security is one of the few remaining income sources designed to last as long as you do. Delaying benefits can make that income source larger.
That is why delayed Social Security can be viewed as a portfolio hedge. It may be most valuable in the very situations where portfolios are most vulnerable: long life, inflation, poor market returns, and survivor income needs.
Retirement Planning Takeaway
Delaying Social Security is not just about trying to maximize benefits.
It is about reducing the pressure on the rest of the retirement plan.
If markets perform beautifully, claiming early and investing may look attractive. But if retirement lasts longer than expected, inflation remains persistent, or investment returns disappoint, a larger Social Security benefit can become much more valuable.
The question is not whether Social Security will beat the market.
The question is whether your retirement plan should depend entirely on the market cooperating.
In the next post, we will look more closely at one of the most common arguments for claiming early:
Here are some frequently asked questions on this topic:
“Why not claim Social Security early and invest the money?”
As we will see, that strategy may sound simple, but it involves more risk than many retirees realize.
Frequently Asked Questions About Social Security as a Portfolio Hedge
How can Social Security act as a portfolio hedge?
Social Security can act as a portfolio hedge because it provides lifetime income that is not directly tied to market performance. A larger delayed benefit may reduce the amount a retiree needs to withdraw from investments later in retirement.
Does delaying Social Security reduce investment risk?
Delaying Social Security does not eliminate investment risk, but it can reduce dependence on the portfolio later in life. That may be valuable if markets perform poorly, inflation is higher than expected, or retirement lasts longer than planned.
Is Social Security better than investing?
Social Security and investing serve different roles. A portfolio can provide growth, flexibility, and legacy value. Social Security provides lifetime income with cost-of-living adjustments. The question is not which one is better, but how they work together in a retirement income plan.
Why is delaying Social Security helpful if I live a long time?
The longer you live, the more valuable lifetime income becomes. Delaying Social Security can increase the monthly benefit for the rest of your life, which may help protect against the risk of outliving your savings.
Should I claim Social Security early if I do not have a pension?
Not necessarily. If you do not have a pension, Social Security may be your primary source of lifetime income. That can make the decision more important. Claiming early may make sense in some cases, but delaying may help create a larger income floor later in retirement.
Source Note
- This article references research by Wade D. Pfau, Ph.D., CFA, RICP, and Steve Parrish, J.D., RICP, AEP, ChFC, CLU, “Which Social Security Claiming Strategy Generates the Highest Legacy Value?” published in the Journal of Financial Planning, January 2023.
This material is for informational purposes only and should not be considered individualized financial, tax, or legal advice. Social Security claiming decisions depend on personal circumstances, including health, income needs, marital status, tax situation, assets, and retirement goals.
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