A lot of people claim their Social Security benefits at the earliest possible age of 62. Social Security Administration data which I’ve worked with showed that 50% of beneficiaries in 2004 had done this. Though I don’t know what that number is today, I hope it is decreasing. That’s because there is a growing recognition that delaying Social Security can be a very effective strategy to extend one’s nest egg in retirement. Let me explain the basic logic of how this works.
Let’s consider a retired individual who is 62 and has a Full Retirement Age of 66. At 66, this person is entitled to their full Social Security benefit. The person no longer works, and their annual benefits at 66 will be $10,000. It’s important to mention that this $10,000 is an inflation-adjusted number, defined in terms of today’s purchasing power. With inflation, that number will end up being higher, but what we really care about is the real purchasing power of benefits. This is why I will discuss things in inflation-adjusted terms.
Based on Social Security rules, starting the Social Security benefit now, when they are 62, will allow the retiree to receive $7,500 per year for life, inflation-adjusted. The retiree can hold off starting benefits until as late as age 70 and receive credit for doing this. In today’s dollars, the retiree will be entitled to $13,200 per year for the rest of their life by waiting to 70.
Let’s consider just the case of deciding between whether to start benefits at 62 or 70. The table (click to expand) shows vital information about these two options. By starting at age 70 instead of 62, the retiree misses 8 years of receiving a benefit of $7,500, but then will receive an additional $5,700 per year for as long as he or she lives.
This becomes a typical investment cash flow problem. Delaying is like paying an annual fee of $7,500 per year for 8 years in order to then receive a payment of $5,700 per year for the rest of one’s life, however long that may be. What is the return on this investment? It depends on how long one lives… but talk about motivating oneself to live as long as possible!
We can get some ideas about the potential by considering the remaining life expectancies for healthy 62 year olds. After crunching some numbers with new data from the Society of Actuaries, I find that a healthy 62-year old male has a 50% chance to live beyond age 84.6, while a healthy 62-year old female can expect to live to age 86.8. For a 62-year old couple who are both healthy, odds are that at least one of them will live beyond age 90.6.
The power of delaying Social Security can then be seen by looking at the implied investment returns from delaying to life expectancy. If you make it at least part of the way through your 84th year, you are already looking at a real inflation-adjusted return of at least 3%. This is quite spectacular in today’s world of low bond yields. Investing in TIPS is the most comparable investment to consider here, and as I check today, 5-year TIPS offer a real yield of 0.03%, 10-year TIPS are 0.6%, and even 30-year TIPS are only 1.29%.
Though it does depend on one’s survival, delaying Social Security offers very attractive investment returns compared to safe alternatives available today. That’s why it can really pay to spend down other assets more quickly until age 70. Though your portfolio will be smaller at 70, the reduced spending needs after 70 (because Social Security is paying you 76% more in real terms, will leave you increasing better off afterward. If you are lucky enough to enjoy your 100th birthday, one thing you will surely be thankful for is that you made the decision to delay Social Security.