Social Security: It Pays to Wait

Social Security is a cornerstone of retirement planning. Although financial planners spend considerable time thinking about portfolio construction and sustainable withdrawal strategies, nothing beats Social Security in terms of its lifetime guaranteed income and automatic inflation adjustments. Given the significance of Social Security in retirement, it’s remarkable how many people don’t do any numerical analysis about when to start benefits. There is a strong behavioral bias to start benefits early. In fact, 74% of beneficiaries begin benefits before their Full Retirement Age (66 for those born between 1943 and 1954).

For many, it would improve retirement income to delay receiving benefits until age 70, even if they had retired years earlier and had to spend some of their assets in lieu of their Social Security checks. The reason it pays to wait is because of Deferred Retirement Credits, which increase your benefits by 8% a year between age 66 and 70. Where else can you get a guaranteed 8% return?

Of course, the reason people don’t want to wait is because it seems like they will “get their money back” sooner by starting earlier. True, but the amount you may receive over your full lifetime could be much, much higher by waiting to age 70. This depends on how long you live, which is another reason people don’t want to wait. Even if you’re healthy, you could always be hit by a bus tomorrow.

The benefit of waiting to age 70 is a 32% increase over the Primary Insurance Amount (PIA) offered at age 66. If you start early, at age 62, your PIA is reduced by 25%. To put this into dollar terms, if your PIA (at age 66) is $2,000 per month, you could instead receive $1,500 a month starting at age 62, or $2,640 a month by waiting until age 70. If you defer to 70, you will receive a 76% increase over the amount available at age 62. These figures are always in “today’s dollars” and do not include Cost of Living Adjustments (COLAs), which increase benefits for changes in inflation as measured by the CPI. (Click here to see historical COLAs since 1975.)

Waiting until age 70 is a great way to help reduce “longevity risk”, which just means outliving your money. No one wants to run out of money in their old age, and delaying Social Security is a great way to reduce this risk. For those who live a long time, delayed benefits will result in significantly higher total lifetime payments and higher levels of annual income available to spend.

Here’s an example, using the $2,000 a month PIA listed above and assuming a 2% rate of inflation.
$2,000/month PIA with 2% COLAs:

Even with 8 years of forgone payments, it’s easy to see that the larger benefit for the 70 year old recipient will eventually catch up and surpass the total amount paid to someone who started at age 62. If you live to 90, here are the total lifetime benefits that would have been paid in this scenario:

If you are fortunate to make it to age 90, you would have received a quarter-million dollars more in benefits by starting at age 70, versus starting at 62. That is a substantial difference! But what if you don’t live to be 90? How long do you have to live to get the same cumulative benefits from starting at 70 as you would have from starting at 62? The break-even in this example, would occur by age 79. For someone in their 60’s who is in good health and has some history of longevity in his or her family, it is very likely to make it past age 79.

If you don’t live to 79, consider Social Security’s survivorship benefit. When a surviving spouse’s benefit amount is lower than the deceased spouse, Social Security will increase their benefit to match the deceased spouse’s amount. In other words, for a married couple, the spouse with the higher benefit amount will determine the monthly amount for both lives. So, if you were the primary breadwinner, maximizing your benefit amount by waiting until age 70 is creating a larger benefit for as long as either of you are alive.

In our example, by waiting from 62 to 70, you would forgo $154,493 in benefits for those 8 years. If you can, in any way possible, figure out how to cover this amount, you will greatly reduce the risk of running out of money 10, 20, or more years in the future.

With continuing advances in medical care and disease prevention, the chances of your living into your 80’s or 90’s is growing every year. Retirement today is likely to last 25 years or more, a reality which has significant financial implications. For a couple, we have to assume that at least one of you could live to see 90. To not plan for this would be nothing short of irresponsible.

While I have given a generic example here, we can plug in your personal Social Security information and prepare a customized analysis to help you with this important decision. Whatever you decide, do it from an informed point of view, and not based on a fallacy like thinking you will get more money by starting sooner.