I thought I would quantify the returns for delaying Social Security retirement benefits. A retiree with a FRA (Full Retirement Age) of 66 could claim 75% of their benefit at age 62. Using mortality tables (RP-2014) we can compute the return for waiting:
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M | F | M | F | M | F | M | F | M | F |
3.8% | 4.4% | 3.4% | 4.2% | 4.3% | 4.7% | 3.3% | 4.3% | 4.4% | 4.7% |
Important notes:
- Because SS benefits are adjusted for inflation, these are real rates of return on government-guaranteed, creditor-protected, payments. Thus these returns should be compared with real returns on government bonds (TIPs) which currently range from -0.23% on a 5-year to 0.90% for a 30-year.
- For married couples the return is even greater for the higher benefit spouse to delay, regardless of the relative ages. (Because there is some chance, however tiny, that the lower benefit spouse will live longer, a married couple will always have a higher expected return from the higher benefit spouse delaying than that same individual would if they were single.) If the lower benefit spouse is female and significantly younger, the expected returns from delay can be very significant.
- Most folks reading this (and their clients) will tend to be the white collar or top quartile folks.
- Taxes should be considered in the decision as well. A higher SS benefit might cause higher SS taxation later, but it also provides an excellent opportunity for partial Roth conversions, etc. in the years before the benefits are begun. On balance I would expect waiting will be even more advantageous for the typical client when these other opportunities for exploiting the low income years are included in the analysis.
- The main financial planning risk for most people is outliving their resources (a combination of a long life and low investment returns) so increasing a government-guaranteed life-long income stream is more valuable than the rates of return indicate because it is most helpful in the worst situations.
Here are the figures for continuing to delay from 66 to 70 (an increase from a full benefit to 132% of it):
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M | F | M | F | M | F | M | F | M | F |
2.2% | 3.0% | 1.7% | 2.8% | 2.8% | 3.4% | 1.6% | 2.8% | 3.0% | 3.4% |
Again we see that the worst case scenario for delaying is still significantly higher than an equivalent investment.
Here are the full returns for waiting from 62 all the way to 70 (from 75% of the full benefit to 132% of it):
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M | F | M | F | M | F | M | F | M | F |
3.0% | 3.7% | 2.6% | 3.5% | 3.6% | 4.0% | 2.5% | 3.5% | 3.7% | 4.0% |
For those born after 1959 FRA is 67 rather than 66. Here is the return for that cohort for waiting from 62 to 70 (from 70% of the full benefit to 124% of it):
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M | F | M | F | M | F | M | F | M | F |
3.5% | 4.2% | 3.1% | 4.0% | 4.1% | 4.5% | 3.0% | 4.1% | 4.2% | 4.5% |