Everyone knows that delaying the starting age of social security increases your benefits. Its right there in your social security statement. But most people don’t know how big an impact delaying social security can have when looked at in terms of investment returns. If retirees knew how big an impact delaying social security can make they might make different decisions.
I’ll use my situation as an example. I’ve found that the percentage changes are approximately the same for everyone I’ve looked at, mainly family members. The table below shows the difference in my and my wife’s social security benefits at the age of 62, 67 (our full retirement age), and 70 years old. I’ve adjusted the benefits to $1 for privacy reasons – the percentage change is what matters here. These numbers we calculated from our actual social security benefit statements. Benefit statements are accessible on-line now.
If we take social security at the first chance we get, 62, we each get $1 in benefits. If we wait until our full retirement age of 67 the $1 in benefits increases to $1.42, and increase of 42%. If we wait an additional three years to age 70, the age of maximum benefits, the $1.42 in benefits becomes $1.76, and increase of 24%. If you look at delaying social security as a type of investment those incremental benefits are your return for waiting. Translated into annual returns your looking at returns of about 7.3% for every year you wait. Even more important, those returns are real returns, i.e. after inflation. And guaranteed. Where can you get 7.3% real returns at that level of safety anywhere?
Such good returns from delaying social security could potentially lead to some big decisions as one nears retirement age. For example, this means you would be better off financially drawing down your savings/investments just to delay taking social security. You’d have to be pretty darn sure your investments could beat a 7.3% real return every year in order to justify taking social security early. Run the numbers with your own benefits and see what they say.
Of course, its not all about money. Many can’t afford to wait. For some, the social security benefits at 62 when combined with pensions are enough to live the retired life they want so working more years is not either necessary or worth it. For others, like my parents, it was more emotional. They had the financial wherewithal to retire without taking social security, live off their savings, and delay taking social security in order to increase their benefits. But they couldn’t do it. They couldn’t trade something tangible, their savings, for the promise (even though quite secure) of higher income later. Economists would probably call this a liquidity premium. For most it’s probably the ‘bird in the hand is better than two in the bush’ school of experience theory. Who said finance was all rational.
In short, delaying social security may be one of the best investments you can make. But it needs to be right for your situation. Personally, I plan on delaying to the max of age 70. But I’m 45, Ask me again in 20 years.
P.S. Maybe part of the irrationality regarding social security is fear over its future. It ain’t going anywhere and its actually an easy problem to fix. Even in the worst case, do nothing scenario young people today would be looking at receiving over 3/4s of their promised benefits. See this post for a great explanation of the current state of social security.
11 Comments
donzidoug · August 21, 2013 at 8:09 am
Comparing two retirees, one who collects his dollar at age 62, the other waits until 70 to get his 1.42. Adding each year from year 1 through year 8 (retiree 2’s first year) and beyond at what point does retiree 2 catch up to retiree 1 who had an 8 dollar head start in his account?. Roughly figuring retiree 2 will catch up to retiree 1 in about 20 years at 90 years old?
20 x 1.42= 28.40
28 x 1 = 28
I am 61 and I am thinking that I will take the money as early as possible, bank it, invest it and if and when I live past 90 I will know that I could have done better. But then it will be like almost every other investment that I ever made. :-)) Of course if I don’t make it that far at least I’ll know that those overtaxing, wasteful bastards in charge of our money had to give at least some of it back!
Please save me Paul and show where I’ve screwed up here. As always you are much better then I am with numbers.!
libertatemamo · August 21, 2013 at 4:54 pm
Thanks for all the great comments everyone. As always SS is not as easy as it first looks.
The payback period is at age at 80.5 or so.
Think of it this way. We need to match cash flows and maintain the same quality of living standard to compare apples to apples. Lets say our lifestyle cost is 1.76 per year. Retiring at 62 I get 1.0 from SS and I need to supplement 0.76 per year from savings forever. Retiring at age 70 I need to provide 1.76 by myself from age 62 to 70 then I need to provide zero going forward.
To get 1.76 at age 70 I need 14.08 (8 * 1.76) total from 62 through 69. Starting at 62, the 0.76 I need to provide a year is equal to 14.08 after 18.5 years. Seen another way, starting at 70 it takes 10.5 years (8/0.76) to make up for the 8 years of 1.0 from SS.
So, if one expects to pass on before 80.5 its worth taking SS at 62, if after 85, then taking SS later is better.
Of course we don’t know when we’re going to go but longevity risk is one of the biggest risks in retirement. The higher payments by taking SS later help protect against this longevity risk.
Again, very personal decisions for everyone to make.
Paul
Mark · August 21, 2013 at 12:56 pm
My thinking is like donzidougs. If you wait to age 67 to receive SS you have given up 60 dollars vs taking at age 62. It will then take almost 12 years or about age 79 to break even.
placestheygo · August 21, 2013 at 1:10 pm
I had a similar thought when I read this blog. If the $1 is per year then at age 80 the person who began collecting at 62 has received slightly more than the person who waited until age 70.
age 62 to 8o = 18 yrs X $1.00 = $18.00
age 67 to 80 = 13 yrs X $1.42 = $18.46
age 70 to 80 = 10 yrs X $1.76 = $17.76
Life expectancy for a male in the U.S. right now is about 76. Would that make the first two better choices than age 70?
georgiaboy51 · August 21, 2013 at 2:30 pm
If I’m still around in 17 more years I’ll be sure to ask “What to you think now?” I’m almost sure you will change your mind.
libertatemamo · August 21, 2013 at 4:55 pm
I’ll put it on my calendar… 😉
Mark · August 21, 2013 at 4:26 pm
I’m sitting in the boat next to donzidoug and was wondering the same thing myself
libertatemamo · August 21, 2013 at 5:09 pm
I had forgotten about a very detailed post on this topic I read a while from Michael at Nerd’s Eye View. The money quote from the piece I think is:
“Which means in the end, the true value of delaying Social Security is a triple-benefit of hedging longevity, poor returns, and high inflation, because of the asymmetrical way that delayed higher benefits compound in the later years. It won’t necessarily win for every client, but as any good hedge should, it wins the most in the times the client will need it the most.”
Paul
libertatemamo · August 22, 2013 at 8:26 am
For those interested Vanguard has a very good life expectancy calculator. Here.
A couple of points to remember. Life expectancy is about planning for probabilities, not a single number. Also, for every year that passes the probability that you live to a certain age increases. Basically, every year you live you are one of the successes and the mortality tables adjust. This is called age-adjusted life expectancy.
Paul
Caroline · August 31, 2013 at 8:04 am
I took at 62 and though a small amount it pays our utility bills in all but the highest cooling month here in Austin. My family members don’t tend to live long, Cancer loves us! Who knows, by taking early maybe Murphy’s Law will kick in and I will live a long life.
libertatemamo · August 31, 2013 at 8:27 am
Those are great reasons to take it early Caroline.
Paul
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