Why It Can Be So Important to Delay Social Security Benefits

It seems like every time I write an article about Social Security benefits that includes a recommendation to delay benefits, I get a lot of responses from well-meaning folks who disagree, sometimes vehemently, with the conclusions.

There are several points of view that I see in the responses, all believing that you should start taking benefits as soon as you’re eligible:

• you never know how long you’re going to live;
• Social Security is going broke, we all know it;
• IT’S MINE, DADGUMMIT, THEY OWE IT TO ME; and
• it’s all part of a huge conspiracy;
• among other reasons too numerous to mention.

Believe me, I have no reason to recommend that people do something that isn’t in their best interests.  As a financial planner, my job is to help folks do things that are in their best financial interests all the time.  Sometimes those things that I recommend run counter to generally-accepted ideas, and sometimes the recommendations have certain assumptions or specific situations that must occur in order for them to work out the way we’ve planned.  But in all situations, the clients’ best interest is being met.

I don’t have an argument for IT’S MINE, DADGUMMIT, THEY OWE IT TO ME, other than to point out that this is an emotional response to a non-emotional decision.  This is a financial decision you’re making – it’s important to weigh the facts before making a choice.  Read on, we’ll get to the specifics of how to weigh the facts a bit later.

I also don’t have an answer to the conspiracy theory.  I just believe that it’s most likely not.  Feel free to think that’s a pollyanna way of looking at it, but that’s my position.  Maybe someday I’ll be proven wrong – but I’m going to continue not believing that somehow, someone else is benefiting from folks delaying Social Security.

I have addressed the concept of Social Security going broke in other articles.  Briefly, since it’s funded by tax receipts it can’t “go broke”.  Benefits can be reduced, or taxed at a greater rate than currently, or the tax rates could increase – but the system can’t “go broke”.

So that leaves the point of view that you never know how long you’re going to live.  I agree, there’s no way to know.  What we have to work with are averages – we know that on average most of us will live until somewhere around age 80, but that means some of us will die much sooner, some will die much later.  This is a conundrum – similar to Pascal’s Wager.

In Pascal’s Wager, we are to choose if God exists or if God does not exist (there is no in-between).  The gain by choosing that God exists is infinite, everlasting life in paradise, and the cost by choosing so is giving up worldly desires for the finite period of your earthly life.  The gain by choosing that God does not exist is present satisfaction with worldly desires. (This isn’t intended to be a theological discussion, so please excuse my brevity in explanation.)

Similar to Pascal’s Wager, if we choose to assume that we’ll live beyond the average, we’ll gain considerable benefits by delaying – and the cost is foregone benefits in our earlier years.  If it turns out that we die earlier than age 80, we will certainly have given up some overall benefits.  So we will have to make a decision.

In the context of all the things that I help folks to make decisions about, I often equate Social Security benefits to an investment account or IRA.  In doing so, we must figure out just what a Social Security benefit is worth, in real money, at various ages.  This is a relatively simple exercise using a spreadsheet to determine the Net Present Value of future cash flows.  In other words, how much money would I have to have in order to produce the same income as my Social Security benefit?

So let’s develop an example: a person has potential Social Security benefits of $18,000 per year if he starts benefits at age 62, or $24,000 per year if he starts at age 66, or $31,680 if he delays to age 70.  If he lives to age 82, these cash flows have Net Present Values of $299,035, $334,611, and $350,389, respectively, assuming a 5% rate of return on the underlying investment.

Given that the average person between the ages of 55 and 64 has something like $65,000 in savings, those values are pretty darned substantial, no matter how you look at them.  But the values can climb – especially if you are married and your spouse will be depending on your benefits after you pass.

Using the example from above, let’s say that the couple are presently ages 62 and 59 (doesn’t matter which one is older, husband or wife).  For the purpose of clarity, let’s say that the wife is the older of the two, and she’s also the higher wage earner over her lifetime – so her benefit is larger.  She lives to age 82, but he is only 79 at that time.  If he lives to age 82, her benefit will be paid out over an additional 3 years – and so then the Net Present Value of the benefit streams equates to $332,726, $383,155, and $419,547 respectively.

The point to all of this is that the delayed benefit is worth substantially more than the earliest benefit – in our first example more than $50,000, and almost $87,000 more in the one where the spouse lives a few years longer.  Given that the present value of the cash flow of the Social Security benefit can be increased to be worth nearly 7 times the value of the average retiree’s overall savings, which is akin to doubling the value of the savings amassed by age 70, if it’s at all possible to delay benefits, you should do so.

On the other hand, if in our example the couple lives only until the youngest is age 75, the delayed benefit still pays off – the amount of money you’d need for each of the options is $250,981 at age 62, or $251,747 at age 70.  If both members of the couple died at any point earlier than that, starting early pays off better in the long run.

So if you’re in a health situation where you don’t expect for you and your spouse to live beyond your respective age(s) 75, then perhaps you should start your benefits as early as possible.  If you live any time longer than that, it’s in your best interest to delay – especially the higher-earning spouse’s benefit – as late as you can.

Keep in mind, the tax benefits of Social Security have not been factored into this equation, nor have annual cost-of living adjustments.  Also, each person or couple’s situation is different, so it pays to work with a professional on your decisions about Social Security.