With more than 10,000 baby boomers crossing the retirement threshold each day, I get my share of clients asking whether they should delay their Social Security benefits. For many retirees, that can be a $200,000+ decision. That's the amount that top earners can expect to receive in excess of their normal benefits should they delay them until age 70.
Each year you delay your benefits past the age of 66 increases your benefit payout by 8%. Waiting until age 70 to start benefits results in a 32% increase in your monthly benefit for life. So I have to ask someone considering the question: "Where else can you earn a guaranteed 8% return on your money?"
Some planners argue that the benefit formula is actuarially sound and that, if you live an average lifespan, you'll receive roughly the same amount in benefits regardless of when you start them. The reasoning being that, if you take them at your full retirement age, you will receive a greater number of payments than if you wait.
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That may have been true one or two decades ago, but the formula, which was devised in 1983, doesn't take into account the current low interest rate environment or the greatly expanded life spans of today.
In today's environment, the question becomes, "Which assets should you sell off to generate income: your low-yielding assets or your high-yielding assets?" If you consider for the moment your Social Security benefit is an asset—after all, it generates an income stream, which has a present value—and it is generating an 8% return, wouldn't it make sense to keep it working for you? For high earning couples, the asset equivalent of their Social Security can be as high as $600,000 or $700,000. Even at $400,000 or $500,000, Social Security represents a sizable portion of a retirement portfolio.
In many ways, Social Security benefits function very similar to Treasury Inflation Protection Securities (TIPS), in that they have a fixed rate of return adjusted by inflation. However, in some ways, Social Security is even better because payouts are based on assumptions made more than three decades ago. As inflation increases, so too do the inflation-adjusted payments, which increases the value of the asset. The longer you live past the assumed mortality rate of 1983, the more valuable your benefits. But that won't always be the case. When interest rates increase, the value of Social Security benefits will decrease.
There may come a time when a bond portfolio will outperform Social Security, but for now, that is not the case. The growth of your Social Security asset is delivering a higher risk-adjusted return than most people generate in their investment portfolios. In the current environment, very few investments are outperforming delayed Social Security benefits. No other investment vehicle offers the following five things: inflation protection, government guarantee, lifetime income, has spousal and survivor benefits and eliminates market risk.
But return is only one part of the equation. As with any critical financial decision, there is no pat answer for this; it depends almost entirely on individual circumstances. However, in guiding my clients' decision, I do suggest that there may be only three reasons they might consider not delaying their benefits:
1. You really need the money.
If you didn't plan well and have to rely on your Social Security benefits to cover your lifestyle needs, then you may have no choice—other than, perhaps, continuing to work in some capacity. A part-time job could generate sufficient income to allow you to delay your benefits.
2. You're disabled.
If you are disabled and are claiming Social Security disability benefits, they automatically convert to a retirement benefit at your full retirement age.
3. You're sick, or you don't expect to live to your life expectancy.
This may be a good reason to start Social Security benefits as soon as possible, except if you are married.
For married couples the goal should be to maximize the lifetime income of the couple not just the individual. When you delay your benefits, they increase not only for you, but also for your surviving spouse. So the spouse with the largest social security income should wait to claim benefits until age 70, in order to maximize lifetime and survivor benefits. If you should die prematurely, your surviving spouse will receive the higher of his or her own benefit or the one you leave behind. If your spouse's earnings were significantly less than yours, he or she may benefit more from the survivor benefit.
Outside of these three reasons, everyone should consider delaying their Social Security. Of course, such a critical decision should be based on a comprehensive analysis of your retirement income need, an evaluation of your retirement portfolio and a detailed spend-down plan.
Craig Slayen is a principal at Cypress Partners., a financial planning and investment management firm in the San Francisco Bay Area.
Pete Woodring, a partner with Cypress Partners, contributed to this article.
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