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.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.