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In The Wall Street Journal, David Blanchett explains the rewards retirees will reap by delaying their Social Security payments. He writes:
Many people worry about the long-term viability of the Social Security retirement system these days. Pre-pandemic estimates put the trust fund going to empty around 2034, but given everything going on with our economy that estimate seems a tad optimistic.
When the trust fund goes to zero, though, it doesn’t mean benefits go to zero. At that point benefits would be based on taxes collected. Assuming nothing changes policy wise, that would reduce benefits to approximately 76% of what they are now.
While I think it is unlikely individuals currently receiving Social Security retirement benefits would experience a cut, the potential impact of a benefit reduction for others does raise a question: Should I get the most out of my benefits while I can?
So, does a potential shortfall make the argument for claiming benefits as early as you can starting at age 62? I recently did some math and ran an analysis to determine how different benefit reductions, expected retirement durations, and portfolio returns affect the optimal claiming decision.
Claiming early can be attractive if you think you can outperform the additional income associated with waiting. The problem is the investment outlook today isn’t all that promising, with 10-year government bonds yielding less than 1%. Expectations for stock returns are generally well below historical long-term averages too.
My analysis shows that there’s a pretty clear pattern where people who expect to live longer, plan on investing more conservatively, and expect a small potential future benefit cut are more likely to be better off delaying claiming Social Security retirement benefits.
For example, assuming average life expectancy, no change in Social Security benefits, and a -1% real rate of return (which is the current real yield on 10-year Treasures), for every $1 used to delay claiming Social Security benefits the person will get approximately $2.31 back, on average. That’s a 131% rate of return. That’s huge.
A key reason for the high payout is that Social Security benefits don’t decline as interest rates decline (like regular annuities), so the lower interest rates go, the more delaying makes sense.
The math changes when a benefit reduction is factored in–but by not by a lot. For average life expectancy and a real discount rate of -1%, assuming a 25% benefit cut, the wealth impact of delaying is still +72%.
Claiming early really only makes sense if you assume a relatively large benefit cut (at least 10%), a relatively high rate of return (a nominal return of at least 5%), and if you think you’re going to live less than the average American.
Even for these people, though, delaying could still make sense based on the other aspects of Social Security benefits, like survivor spousal benefits and their tax-favored nature. Social Security benefits are also explicitly tied to inflation, something you can’t get anywhere else today.
Read more here.
