Delaying Social Security Payments is Worth 7%

The Wall Street Journal has an interesting take on the value of Social Security. Specifically they look at what it's worth to delay taking benefits. They calculate the value of the delay and give it a return percentage as if it was any other investment you might make. What makes this compelling is that under certain circumstances, the value of Social Security is the same as that of a bond yielding 7%. Their thoughts:

Consider an unmarried man in average health, age 62—the youngest age for starting retirement benefits. His payoff for waiting until age 67 to collect is the equivalent of buying a long-term bond that pays 3.2% a year. For a woman, all else held equal, it's a 4% yearly return, according to Mr. Shoven and his research partner, Sita Slavov at Occidental College.

Here's the whopper: For married couples, if the higher-earning spouse delays payments from age 62 to 70, but at age 66 begins collecting spousal benefits from the lower-earner's plan (as Social Security allows), the return is like owning a 7% bond.

Not just any bond, either. The fictional alternative would have to be government-guaranteed and provide periodic inflation adjustments. And the income would have to be tax-free for most recipients.

The closest real-world investments are Treasury inflation-protected securities, or TIPS. They're government-backed and inflation-adjusted, but they're subject to federal (but not state and local) tax. Ten-year TIPS on Thursday paid minus-0.21%. That's not a misprint; bond rates are so low that investors are paying to own TIPS just to get the inflation adjustment.

Put differently, a 7% annual return for delaying Social Security payments is for many investors better than a bank certificate of deposit that pays more than 10%, considering the inflation adjustment and tax advantages.

A few thoughts here:

• Is it just me or is Social Security very over-complicated? When it comes my time to get SS, I'm going to have to hire an expert to help me sort through the mess to determine my best option for taking it.


• That's a HUGE return in today's world. Just think how you'd like to have a bank CD that paid 10%. Now you see how valuable waiting could be.


• The one downfall I see: If you actually own a bond/CD and die, your heirs get the investment. If you die with SS it's not like they get some sort of inheritance from it.


• Personally, I think Social Security will look radically different for me by the time I get to 70 (or even 62). In fact, it might not even be around for those with higher incomes/net worths. As such, I'm saving for retirement as if I'll get zero from it. Then if I do receive anything, it will all be gravy.

Any other thoughts on this issue?

Comments

[Matt]

Yes you will need someone to help you figure it out. It will change and evolve.

There are a few people I know who were hit by the great recession layoffs and became part of the 99 weeks of unemployment. They all were close or at 62. All of them started taking SS because there portfolios were too heavy in equities and did not have enough saved.( I won't comment on there planning) They were forced to start SS early.

I see other people heading down the same road. They will not have a choice in taking SS. They did not plan wisely.

I know I will need someone to help me when I retire to help make that decision.

[William @ Drop Dead Money]

Hey look - a new career for someone over 60: Social Security Advisor! Do something dear to your heart, become an expert and get an income to supplement the very thing you're talking about! And don't worry about job security: Uncle Sam's bureaucrats and Washington's politicians and special interest groups will work for you, doing what they do best: complicating things even further.

IN all seriousness, I agree - that WSJ article is a great take on Social Security I've not seen before, especially the strategy of taking the "halfway" entry point for the lower of the two.

Thanks for sharing!

[Lance @ Money Life and More]

Social security is very confusing even to an accountant! I personally am planning to retire without it but if I do end up getting it it will be some nice fun money to blow on whatever I want without worry!

[retirebyforty]

My plan was to wait until full retirement or later to start receiving benefit, but I guess it all depends on your health. If you are healthy and are financially stable, it would be viable to wait. If I have any health issue, I'd probably take it as soon as possible. Who knows how long I'll be alive. My family doesn't have a history of longevity...

[Old Limey]

It surprises me how many younger people feel that Social Security will not be available when they retire, but are blithely making plans to get along without it.

If the government is forced to renege on Social Security, that will be the least of their problems since it would be such an unprecedented event that it would take a far greater government calamity to bring it about.

What we all need to be concerned about is that government spending is completely out of control and we don't appear to be on a course that will bring America back to the "Good Old Days" that my generation has lived through.

Europe is an example that clearly shows that a Welfare State that provides free healthcare, a free university education, and the elimination of poverty requires exorbitantly high taxes of one kind or another, such as a VAT of 20% on all purchases. Our current political apparatus is totally deadlocked on everything and is unable to agree on a way out of the current mess.

How things have changed since the "Goldilocks economy, not too hot, not too cold, but just right!" we had during the Clinton years and the $300 billion surplus he left behind.

[Scott]

Both my parents, long divorced, retired before age 60 and grabbed Social Security as soon as they could. Neither did so because they really needed the money. My father did so impulsively, but my mother at least thought about it a little. I think I agree with their actions; getting it early rather than waiting for a bigger payout down the road. In my opinion, when you’re 75 or 80, life’s going to suck whether you’re driving a Chevy or a BMW.

What’s my point? Maybe you don’t need a fancy accountant to decide when to take Social Security after all.

[Apex]

@Scott,

I could not disagree more.

First of all many people who are 75-80 do not have a life that sucks.

Second of all, if life does suck, I am certain it will suck far worse when you don't have enough money to pay the bills.

Waiting is more important for those of lesser means that for the well off. If you are low on money you need to find a way to wait. if you don't, your SS check is going to leave you with meager means for 20 years and probably one that gets more meager as you get older because the costs of an old person tend to rise faster than inflation and the SS COLA increases.

[Apex]

SS is indeed quite complicated.

The second paragraph is the key.

That is exactly what I intend to do if the plan is still structured as it is today. It's most likely the optimal way to draw benefits. They don't say it in the article but the lower earner should start drawing as soon as they can do so without having their checks cut (if you make too much you have to give most of it back prior to age 67).

If your spouse has minimal SS wages then the next best option is what is called file and suspend. You file at age 67 and immediately suspend. Your spouse draws a spousal benefit off of your SS but you do not. Then at age 70 you resume and now both your draw and your spouses draw goes up to the value as if you had waited until age 70 (because you did) but in the meantime your spouse was able to draw a 1/2 spousal benefit off of it without it counting as if you had drawn early.

[Georgia]

Perhaps I'm reading this in the wrong way, but I find it disturbing. Everyone is saying SS is in trouble of sorts and yet you are all trying to find the best way to get the most out of it, allowing it to tumble faster. My husband took his at 62 and died at 71. It served him just fine. I took mine at 65 and it is still doing okay for me at 75. They offered to check his SS to see if I could get a larger benefit from his, but I told them not to bother. I was already making more than him.

Please correct me if I am wrong in this idea that we're all out to get all we can out of the system, even if it sends it into an earlier demise. I always like to think the best of people.

[Old Limey]

@Scott
I'm 77 and my wife is 79. We have been retired for 20 years and I can vouch for the fact that Retirement sure beats Working. We happen to have two Mercedes but one is a '91 and the other is a '98 and they were both purchased used. I feel very sorry for people that have such little self worth that they think that driving around in a new BMW convertible makes them feel special and envied.

Life changes with age. We have been married for 56 years and every phase of our life has been happy and fulfilling and certainly has never "sucked" as you so crudely put it. Back in the 80's I loved my work so much that I used to look forward to going in every single day. Later on when we became world travellers and took 2 or 3 overseas trips every year we found that very exciting. We gave up travelling in 2010 but are still extremely happy leading a very quiet life spending the majority of time in our beautiful home and garden.

We both took Social Security at 62, and that along with our two pensions is plenty enough to lead a very happy life without even tapping into our large investment portfolio. Life is what you make it, and what others think about your lifestyle shouldn't matter in the slightest.

[Apex]

@Georgia

You are correct that people are trying to maximize their payouts. However keep in mind that the system has been setup to offer different payouts at different times to generally give similar total outcomes upon death. The same thing happens with a pension system. Also keep in mind that most people who delay drawing do so by continuing to work and so they likely are still paying into the system and since only 35 years of payments count most of what they are paying in on those extra years are gravy for the system. They get little benefit from them and the system benefits greatly.

However with respect to how you schedule payments for a spouse who is getting spousal benefits etc, different choices can definitely result in more money taken out of the system. Voluntarily choosing not to take advantage of those options would mean taking less money out of the system that it is offering to you.

If I understand this correctly you are arguing that some of us should not be careful to ensure that a retirement pension system that is available to us gives us the best possible outcome. And the reason is because the system has problems so we should voluntarily choose a less than optimal payout to help the system out. Is that correct?

If so I would submit that you should perhaps consider taking only 75% of your payout because the system is only taking in enough money to pay out 75% of the promised benefits. Are you willing to do that?

[Luis]

FMF, please dissect it or have a guest post much like you did with the similarly complicated life insurance policies.

[Super Saver]

Whether delaying pays out depends on age of death.

In my case, I calculated my breakeven age of death to be 78. Before 78, taking SS at 62 gets more money. After 78, taking SS at 70 gets more money.

[08graduate]

@Georgia @Old Limey

Here's the hard actuarial data to support the 75% figure Apex cited:

http://www.ssa.gov/oact/TRSUM/index.html

Social Security outlays are going to skyrocket in the next two decades. Medicare, even more so. There's no calamity involved, just a simple demographic trap: the population of beneficiaries is going to grow much faster than the working population. As a result, expenditures will exceed revenues.

Neither you nor I know how Congress will respond to that gap. They could raise taxes. They could cut benefits across the board. As FMF says, they could phase out benefits based on income or net worth. They could even phase out the entitlements altogether! All of these are precedented in the history of federal programs, and they all seem completely plausible in this case.

Accordingly, I think planning for the worst-case scenario for one's household is prudent, not "blithe". I can't control the nation's political, fiscal, demographic, or economic trajectory, but I certainly can control my own savings.

[Old Limey]

Here are two sobering FACTS most of you may be unaware of.

The Unfunded Liabilities of Social Security are $8.6 Trillion or $73,167 per household.

The Unfunded Liabilities of Medicare are $38.6 Trillion or $328,404 per household.

These two programs will definitely have a profound impact on today's young people and future generations.

[08graduate]

@Old Limey Just so. Those numbers are the unfunded liabilities for the next 75 years, so it's not quite as dire as it sounds, but it's certainly bad.

Also, now I'm confused about your position. You understand the magnitude of the shortfall. Why are you surprised that "younger people feel that Social Security will not be available when they retire"?

[Lloyd]

Many nearing retirement are saddled with debt, and could come out ahead by withdrawing earlier. The return for waiting may be 7%, but the return on money withdrawn earlier may be as high as 18-21% if the extra money enables a pay down of credit card debt.

[Old Limey]

1) I favor withdrawing as early as possible because once you get to 62 your life expectancy could possibly be short. I will be 78 next month and feel in excellent health.

2) I just feel that both political parties will do everything they possibly can to NOT be the party that pulled the plug on Social Security since there are 53 million voters receiving it.

[FMF]

Luis --

That's one of the problems, I don't think I'm qualified to. It's simply too complicated.

I think William may be on to something. Perhaps I'll study the topic and then hire myself out as a SS consultant. :)

[Carol]

I'm taking SS when I turn 66, my normal retirement age. Along with my pension, I'll do fine; no more full time work for me.

[Jim]

SS is fairly complicated but I don't think its too much more complicated than a private pension or annuity.
If you retire early then you get less. If you earn more then you get more. Spousal benefit options are where they can get more complicated.

[JayB]

Well, I have 34 years to go before I am even 62, I find this topic interesting but its probably safe to say that nothing about the SS system will be the same then.

I almost skipped right past this topic since it is so far away and not really worth me worrying about, but I was interested in the comments and how it affects the FMF community I feel like I have gotten to know.

I have no wife or kids yet, so my financial situation will hopefully be largely different in the next ten years too. I guess with time on my side, I should work on finding a way to retire without the help of SS since its fate is unknown and big changes look certain.

[Mark]

It's not enough to do a breakeven calculation.

If you think of SS as insurance against living too long (longevity insurance), then you should draw it later rather than sooner.

If I die young, I am not going to be too concerned that I missed out on SS payments. If I live long, I will be happy to have the higher payments.

[Sanderson]

... "Take-the-Money-and-Run" & "A Bird in the Hand....."

____________

The Social Security Administration closely calculates the age-62+ payouts-- based entirely on average 'life-expectancy'.

(you get less monthly at 62, but for many years more than people who 'wait' years for higher SS payments-- and die at an average age. It all evens out at your death)

So for most people it makes no difference whatsoever as to when you start taking SS -- the total SS payout to you is the same.

Only a small minority of people who live significantly longer than average... would benefit from delaying SS income, overall.

You can't leave that SS money to your children if you guess wrong about your death date.

Plus, as previous comments rightly noted-- Social Security (and Medicare) can NOT possibly continue in their current form... for more than 5-10 years. Radical changes MUST happen-- you WILL get less than expected.

SS went bankrupt under President Reagan; so they sharply cut benefits and raised SS taxes. It will happen again, only much worse.

Take the money and run as soon as you can-- it's your money that you paid in.