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Why You Should Postpone Your Social Security Benefits

Delaying your Social Security may be the answer for financial success despite talks of insolvency.

By John Rafferty

According to an article on CNBC’s website, Social Security will only be able to pay out 80% of benefits after 2035 if nothing is done to bolster the program. This notion of future benefit cuts has been floating around for years and may compel many people to decide to take what they can while they can – perhaps as early as 62 years old, before any reduction takes place.

However, a case can be made for both pursuing a delay and perhaps for buying enough private annuity income to fill any future reduction in benefits. But first, a review of the basic mathematical appeal of delaying, assuming no reduction in benefits.

Want a 10% Return, Guaranteed? Delay Your Social Security Benefits.

By simply choosing to delay retirement benefits from age 62 to age 70, one can enjoy a cash flow, which is guaranteed for life (and for the surviving spouse) and doubles in nominal value. The difference in nominal annualized cash flow beginning at age 70 vs age 62 is the equivalent of a compound annualized growth rate of 10%. That’s a return that may be hard for stock and bond markets to beat, so delaying Social Security can be an effective –and guaranteed– way to pump up your future income.

How Much Higher is Social Security at 70 than at 62?

The answer: It depends on what metric you choose. Do you want to compare the difference in today’s 2022 dollars, or in inflated future dollars (also called nominal dollars)? Here is an example using the Social Security Administration’s online Quick Calculator:

This calculator asks the user to select either future benefits in today’s 2022 dollars, or in inflated, future dollars. In our example below, both were chosen.

EXAMPLE:

A retiree stops working in 2021, having earned $200,000 in that year. They turn 62 in June of 2022 and have a substantial retirement portfolio from savings and investments over their just-finalized career. According to the Quick Calculator, if they start benefits:

  • In June of 2022 at age 62, they will collect $2,269 a month.
  • In June of 2030 at age 70, they will collect:
    •  $4,901 a month (in future 2030 dollars)
    • $3,996 a month (in today’s 2022 dollars)

By waiting to receive benefits until age 70, their monthly benefit has increased by 115%, or about 10.1% compounded, per year, over eight years if we use future 2030 dollars (which will naturally purchase less than today’s 2022 dollars). If we instead use inflation-adjusted dollars meant to convey the value of those dollars in 2022 purchasing power terms, the projected 2030 payment will be $3,996 a month. This is 76% larger than the amount at age 62 and equates to an inflation-adjusted compound annualized growth rate in the benefit amount of about 7.3% per year over those eight years of waiting to collect.


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What if benefits are cut in time to collect at age 70? Was delaying still worth it?

Let’s assume benefits are reduced by 20% by the time one turns age 70, using the examples above. They have decided to forgo the $2269 a month that could have been collected at age 62 and have forgone all benefits for eight years. They’ve done so because they were expecting the $4901 a month at age 70.

Instead, benefits are now reduced just in time to turn age 70 and collect.

  • In June of 2022 at age 62, $2,269 will be collected a month.
  • In June of 2030 at age 70, at 80% of expected benefits, one would collect:
    • $3,921 a month (in future 2030 dollars)
    • $3,197 a month (in today’s 2022 dollars)

Now, after the reduction but still waiting to receive benefits until age 70, the monthly benefit has increased by 73% instead of 115%, or about 7.1% compounded per year, over eight years in future 2030 dollars. If instead inflation-adjusted dollars (meant to convey the value of those dollars in 2022 purchasing power terms) are used, the projected 2030 payment will be $3,197 per month, which is 41% larger than the amount at age 62 and equates to a compound annualized growth rate in the benefit amount of about 4.4% per year over those eight years of waiting to collect.

Yes, those are certainly reductions, but the benefits of delaying remain compelling for those who are positioned to benefit. Where else can one get the equivalent of a guaranteed nominal growth in future cash flow of 7.1% per year?

Before we wrap up with who might be best positioned to benefit from a delay strategy, let’s consider how one might want to purchase their own private solution to fill the anticipated cash flow gap left by a 20% reduction. We’ll use our example above, where the anticipated nominal monthly cash flow at 70 was expected to be $4,901 but was cut to $3,921. That’s a reduction of $980 a month, or $11,760 a year.

How much does it cost to produce $11,760 annually, guaranteed for life, beginning at age 70?

A 62-year-old can purchase a fixed indexed annuity with a guaranteed lifetime withdrawal benefit feature as a solution to hedge against the possibility that future benefits are reduced. In the example here, the person wants to guarantee the right to take withdrawals of no less than $11,760 a year beginning at age 70. (Since this cash flow will remain static, one might want to purchase more to offset future inflation.)

The most competitive contracts today will produce a lifetime cash flow covering one life, beginning at age 70 and using annual lifetime withdrawals of about 9-10% of the purchase amount at age 62. This means the annuity purchase required to produce $11,760 a year covering a single life at age 70 is between $120,000 and $130,000.

That is a modest price to pay for those who can afford to delay their social security benefits, and it is also only a backup plan. Should benefits not be reduced, the annuity value at that time can be repurposed for other uses if that makes more sense.

Who Can Benefit from Delaying Social Security?

Those who have significant financial resources and can afford to fund their own retirement until age 70 can also afford to delay starting benefits until age 70. Health status and family history also play a role in considering whether to delay benefits until age 70. For example, if a single person or at least one member of a couple is in excellent health and has a history of family longevity, they’ll have a higher likelihood of enjoying those larger payments for longer and perhaps enjoy more total Social Security benefit income than if they had begun at age 62.

Typically, the “breakeven” age, or the age at which total accumulated payments from Social Security started at age 70 would exceed those begun at age 62, are at or near average life expectancy, which makes sense since there is a high degree of actuarial neutrality in the calculation of benefits. In other words, the Social Security Administration has no preference or financial interest for when one begins receiving benefits.

Summary

For those who can afford to delay Social Security benefits, and for whom it makes the most sense health, longevity, and legacy-wise, it will be difficult to beat the scale of cash flow that such a delay can produce, using traditional asset accumulation approaches. That holds true even if future benefits are reduced. Buying an annuity to fill the anticipated reduction in future benefits can also be a cost-effective way to ensure that future guaranteed cash flows are at the desired levels.

About the Author: John Rafferty 

John Rafferty has spent much of his 30-year career building annuity marketing departments at MassMutual, AIG/American General, and Symetra. He holds a B.A. in economics from Colby College and an M.A. in public policy from Trinity College, and currently operates an annuity sales and marketing consultancy, RaffertyAnnuityFraming.com


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