Worth the Wait

Jonathan Clements

THE DEBATE OVER when to claim Social Security reminds me of the debate over index funds. On one side, there are those who have studied the issue—and on the other side are crackpots and those with a not-so-hidden agenda. Yes, you should index. Yes, most folks should delay claiming Social Security retirement benefits.

Elsewhere, I’ve written about the breakeven age for claiming Social Security, assuming you took your benefit and invested it. The upshot: Taking benefits at age 66 or age 70 is typically a better bet than taking benefits at 62, as long as you live until your early 80s. The life expectancy for a 65-year-old man is age 84, while for a woman it’s age 87. The upshot: Delaying benefits will usually turn out to be a smart move.

This weekend, I read Social Security Made Simple, the recently revised book from Mike Piper, author of the Oblivious Investor blog. He offers an alternative—and perhaps even more compelling—way to analyze the issue.

Suppose you are age 62 and currently eligible for $750 a month from Social Security. If you wait one year to claim benefits, until age 63, you will receive $800 a month. Thus, for missing out on 12 months of benefits at $750 a month, or $9,000 total, you will receive an extra $600 a year for the rest of your life starting at age 63, with that $600 rising each year with inflation. That’s a 6.67% annual payout on your $9,000 “investment.”

What if you used that $9,000 to buy an inflation-adjusted income annuity from an insurance company? Today, a 63-year-old might receive an annual payout of between 4% and 4½%, far less than 6.67% that you would get from Social Security. What if you invested the $9,000 in a mix of stocks and bonds? Today, many financial planners caution retirees to use a 4% withdrawal rate, again far less than the 6.67% you can get by delaying Social Security.

As Mike Piper notes in his book, “A similar analysis can be performed for each year up to age 70, and the conclusion is the same: Delaying Social Security benefits can be an excellent way to increase the amount of income you can safely take from your portfolio.”

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