Reap Higher Returns By Delaying Social Security

You may be tempted to claim Social Security benefits as early as possible with the idea of investing the payments in the markets. A retirement expert has crunched the numbers. His conclusion: Unless you die early, you'll come out ahead by waiting until 70 to collect your benefits.

As long as you live past 84, you can earn an annual inflation-adjusted "implied investment return" of more than 3% by delaying, according to Wade Pfau, professor of retirement income at the American College of Financial Services, in Bryn Mawr, Pa. That's considerably better than a ten-year Treasury inflation-protected security, which recently offered a real yield of 0.51%.

Pfau assumed a 62-year-old would be entitled to an inflation-adjusted $10,000 a year if he waited to 66 to collect. At age 62, he would get an inflation-adjusted $7,500 each year for life. Wait until age 70, and his annual benefit in today's dollars would be $13,200—an extra $5,700 a year than if he had claimed at 62.

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Pfau compares the advantages of delaying benefits to a bank account in which you deposit $7,500 a year for eight years. In the ninth year, you start withdrawing $5,700 a year for the rest of your life. What would the interest rate have to be to finance those withdrawals over your lifetime?

The answer depends on how long you live. Pfau calculated that a healthy 62-year-old man had a 50% chance of living beyond 84, and a healthy 62-year-old woman could live to nearly 87. For a 62-year-old couple, the odds were that at least one would live longer than 90 years.

If the man lived just past his 84th birthday, he would earn an inflation-adjusted return of 3.2% on his benefits by delaying. A woman who reaches 87 would earn 4.4%. The couple would get a 5.2% return if one spouse makes it to 90. The longer you live, the better the return (see Pfau's table at http://wpfau.blogspot.com).

For those who think they can do better in the stock market by claiming early, Pfau says, "you would take on a great deal of market risk and could end up worse."

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