For years, there’s been a consistent recommendation from me and other retirement researchers. People should delay beginning Social Security retirement benefits for as close to age 70 as possible. New research adds to the evidence in support of that recommendation.
Delaying Social Security benefits to age 70 instead of 62 increases monthly benefits by 77% in inflation-adjusted terms, according to a new paper in the Journal of Financial Planning by Wade Pfau and Steve Parrish. Most people know that or at least know there’s a big increase in monthly benefits when they’re delayed.
Many people don’t fully understand the benefits of delaying benefits.
One factor in favor of delay is that the actuarial data used to determine Social Security benefits were designed in 1983. The differences between benefit levels paid when claiming is at different ages was set to make the Social Security system indifferent to when people make their claims. Actuaries used life expectancy data to set the benefits at levels that would cause the system to pay the same lifetime benefits when people live to average life expectancy.
But average life expectancy is much higher now than in 1983 when the benefit levels were set. That means that instead of half the age group living past average life expectancy, more than half your age group is likely to live beyond average life expectancy. It follows that more than half the age group will receive higher lifetime benefits by delaying their initial benefit claims.
In addition, interest rates were much higher in 1983. You receive less income from your investments than in 1983. So, it makes more sense now to spend other assets to pay expenses while delaying Social Security benefits a few years so the monthly income will be higher.
These factors are in addition to the annual, tax-free increases in benefits that are guaranteed each year you delay receiving them.
The study also pokes holes in the strategy of claiming benefits early in order to invest them.
To benefit from this strategy, the beneficiary has to earn high enough investment returns to more than offset the automatic increases from delaying Social Security benefits. Between full retirement age and 70, the annual increase for delaying benefits is 8% per year, tax free. That’s a steep hurdle for an investment strategy to clear.
Of course, even when your investments have done at least that well in the past, future success isn’t guaranteed. The increases in Social Security benefits are guaranteed.
Plus, once the higher level of Social Security benefits begins, it increases each year with inflation. To justify taking Social Security benefits earlier, the investment returns through retirement must beat this inflation indexing.
For many retirees and near retirees, success from this strategy requires them to take more investment risk through aggressive portfolio allocation than they normally would.
The authors say that that an examination of historic data indicate it isn’t common for investment returns to beat the return from delaying Social Security benefits, especially for beneficiaries who live longer than average life expectancy and receive those extra years of benefits and inflation indexing.
The research is consistent with other research.
The case for delaying benefits is especially strong for the higher-earning spouse in a married couple. The couple receives two Social Security benefits while each is alive. But after one spouse passes away, one Social Security benefit ends. Usually, the higher of the two benefits is continued to the surviving spouse. The couple should want that benefit to be as high as possible, regardless of which spouse survives.
While there are people for whom it makes sense to take Social Security benefits before age 70 and even before full retirement age, in many cases the highest lifetime payments are received by delaying benefits.