For years, there has been a consistent recommendation from me and other retirement researchers. People should delay the start of Social Security retirement benefits until age 70 as much as possible. New research adds to the evidence supporting this recommendation.
Postponing Social Security benefits to age 70 instead of 62 increases monthly benefits by 77% in inflation-adjusted terms, according to a new article in the Financial Planning Journal by Wade Pfau and Steve Parrish. Most people know this or at least know that there is a big increase in monthly benefits when they are delayed.
Many people don’t fully understand the benefits of delaying benefits.
A factor in favor of the delay is that the actuarial data used to determine Social Security benefits was designed in 1983. The differences between the levels of benefits paid when the claim is at different ages were fixed to make the security system social indifferent to when people make their requests. Actuaries used life expectancy data to set benefits at levels that would cause the system to pay the same benefits for life when people live to average life expectancy.
But average life expectancy is much higher today than in 1983, when benefit levels were set. This means that instead of half of the age group living beyond the average life expectancy, more than half of your age group is likely to live beyond the average life expectancy. . As a result, more than half of the age group will receive higher lifetime benefits by delaying their first claims for benefits.
Also, 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 a few years social security benefits so that the monthly income is higher.
These factors are in addition to the tax-free annual increases in benefits that are guaranteed each year you are late in receiving them.
The study also punches holes in the strategy of claiming benefits early in order to invest them.
To benefit from this strategy, the beneficiary must earn returns on investment high enough to more than offset the automatic increases due to the deferral of Social Security benefits. Between full retirement age and age 70, the annual increase for deferred benefits is 8% per year, non-taxable. This is a big hurdle for an investment strategy to overcome.
Of course, even when your investments have done at least as well in the past, future success isn’t guaranteed. Increases in Social Security benefits are guaranteed.
Also, once the top tier of Social Security benefits begins, it increases each year with inflation. To justify taking Social Security benefits sooner, the returns on investment through retirement must beat that indexation to inflation.
For many retirees and near-retirees, the success of this strategy forces them to take on more investment risk through aggressive portfolio allocation than they normally would.
The authors say a review of historical data indicates that it’s not common for investment returns to beat the return of delayed Social Security benefits, especially for recipients who live longer than life expectancy. average and receive those additional years of benefits and indexation to inflation.
The research is consistent with other research.
The case for deferring benefits is particularly strong for the higher-earning spouse in a married couple. The couple receives two Social Security benefits as long as each is alive. But after the death of a spouse, a Social Security benefit ends. Usually, the higher of the two benefits is continued to the surviving spouse. The couple should want this benefit to be as high as possible, regardless of the surviving spouse.
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 lifetime payments higher are received by delaying benefits.