Thomas N. Bethell, Visiting Scholar, National Academy of Social Insurance
Thomas N. Bethell, Visiting Scholar, National Academy of Social Insurance
That headline – atop a recent Wall Street Journal column by Jack Hough, associate editor of SmartMoney.com – pretty much says it all.
Hough writes: “For an investment return that tops those offered by hedge funds, insurance firms or Wall Street banks, baby boomers should look to Social Security… All you need is a way to make ends meet while delaying the start of Social Security benefits from age 62 to as old as 70.”
As NASI made clear in a 2010 brief, there are major advantages to waiting – if you can – to start collecting Social Security benefits. Although workers can get benefits at age 62, if you can wait until you’re 70 your benefit will be about 76 percent higher than it would be if you had started collecting benefits at 62. It pays to delay even if you can’t wait until you’re 70.
To put these advantages in investment terms, Hough asked John Shoven, director of the Stanford Institute for Economic Policy Research, to run some numbers. Among his findings:
- For an unmarried woman in average health, the payoff for waiting until age 67 to collect is the equivalent of buying a long-term bond that pays 4 percent annually.
- For a married couple, if the higher-earning spouse delays payments from 62 to 70, but at age 66 the lower-earner begins collecting spousal benefits, as Social Security allows, the return is the equivalent of owning a 7-percent bond.
“Not just any bond, either,” Hough points out, noting that an equivalent private-sector bond would have to be both government-guaranteed and inflation-proof. But no such bond exists.
In the real world, the closest investments are Treasury Inflation-Protected Securities (TIPS), which are government-guaranteed. But 10-year TIPS are currently yielding 0.21 percent annually.
Working past 62 isn’t always possible, especially for workers in physically demanding jobs or with health problems. But for those who can keep working, or who have enough other retirement resources to allow them to postpone claiming Social Security benefit for a few years, the payoff is clearly rewarding.
What about media-stoked fears that at some future date Social Security will be unable to pay full benefits? We heard a fresh round of alarms this week, following release of the 2012 Trustees Report. But Hough quotes Stephen C. Goss, Social Security’s chief actuary, who notes that Social Security has sufficient reserves to pay 100 percent of scheduled benefits until 2033 and about 75 percent thereafter – and that Congress historically has always acted before a deadline for action arrives.
The bottom line, from Stanford’s John Shoven: “If you’re healthy enough to work at 62, you should probably wait as long as you can to collect.” And that’s especially true if Social Security is likely to be your main source of retirement income, as it is for about two-thirds of today’s retirees. Working longer, when feasible, is the single best way to get the best possible return from the safest investment you can make.
This is a new twist! But it
This is a new twist! But it runs counter to everything I’ve heard in the past. The usual calculation I’ve seen done shows that if you don’t claim benefits at age 62 and wait until age 65 to get the increased payout, you’ll spend about 17 years trying to recoup the benefits you didn’t get between 62 and 65. I’ve done that math and had made up my mind to begin getting benefits as early as possible. Now I’ll have to look again.
Hi Daniel. Thanks for your
Hi Daniel. Thanks for your thoughtful comment, which addresses an important issue. You’re referring to a “break-even analysis,” which many financial planners have used as a tool to advise clients about determining the “best” age to claim Social Security benefits. The break-even age is the age at which the present value of delaying benefits is equal to the present value of taking early benefits. The theory is that If you die before reaching the break-even age, taking early benefits will have made sense. If you live beyond the break-even age, you will have lost by taking early benefits. A break-even analysis has limited value, especially if conducting such an exercise results in pushing someone toward taking Social Security benefits as early as possible. We can’t know how long we’ll live. Many of us are living longer than expected; the probability of living to 90 is now nearly 1 in 4 for men, 1 in 2 for couples (that is, one spouse living to 90). The unique strength of Social Security is that it lasts as long as you live and keeps up with inflation. In contrast, savings decline and inflation erodes the value of other retirement income. So it makes sense to rely on other income sources in the early years of retirement, if feasible, and then on Social Security later, when benefits will be as big as possible and adequate protection against inflation will be increasingly important. All things considered, if you think there’s a good chance of living to advanced old age, maximizing your Social Security benefits by waiting to claim them until 70 can provide peace of mind as well as a lifelong income stream protected against erosion by inflation.
trying to help a client who
trying to help a client who is 62 and still working
and whose husband passed away in Dec 2015 and was 66.
He had various serious health ailments and died of ALS.
He was receiving disability since 2009.
Question is how does his DI affect the widow’s decision on whether she should take his survivor benefit now and then delay taking hers until at least she reaches FRA at 66?
How do we analyze this problem ..what other info do we need? Would she have to pay back any benefits from him when she is 66 and starts her SS benefits?
I have a question about
I have a question about receiving social security benefits, in January I will turn 67 years old, if I opt to start receiving social security how much money am I allowed to make if I continue to work
Hi Peggy. The Academy is a
Hi Peggy. The Academy is a nonprofit, nonpartisan membership organization and, as such, does not provide specific financial advice to individuals. The National Academy of Social Insurance is not a government organization. The Social Security Administration might be able to help. SSA’s website is http://www.ssa.gov. Good luck!
You havent address the
You havent address the ‘value’and ‘worth’ not working those 8 years and taking it easy. if you have other income you can ‘retire’on, i would probably agree that you could wait until 70, 80 or forever to take it. but if it means working part or full time for more years by trying to maximize the amount you get, there is inherent value and worth for relaxing, kicking your feet up and enjoying your hobbies full time by retiring at age 62. you get more years of that and it is worth something to some people. Quantifying that worth is a challenge, but I don’t think anyone can go just by numbers alone to make their conclusion that it is worth waiting.
My issue with this analysis
My issue with this analysis is that you’re putting forward the idea that a 4% government bond is a great thing and you should jump on it as soon as you can. As you note, life expectancy is probably 20+ years at age 62. So this is the equivalent of telling someone 20 years away from retirement that they should put all their money in a 4% government bond.
At 20 years, there are much better investment mixes to make/recommend. Sure 4% government bond is great if you’re looking to invest in a bond. But over a 20 year horizon, the return of a low-cost investment in an S&P500 index fund or other efficient equity investment will outperform a vast majority of the time, no?
The ability to get an attractive yield on a bond doesn’t mean you should invest in it.
Reaching back to David
Reaching back to David Daniel’s break even analysis comment in 2012, my analysis agrees with his. I looked at two scenarios – taking SS benefits 1 year early and 2 years early. Similar to David, it appears to me both cases break even around 15 years out. But if I invest the early SS benefits at 2% interest, it appears the break even point is pushed out to 25 years later. If I can invest the early SS benefits at 3%, it appears to me the taking the early benefits remains better even if I live to 110 years old.
Tom Bethel’s reply in 2012 doesn’t make sense to me and is contrary to my analysis. What am I missing?
This article was posted in
This article was posted in 2012. The law regarding the collection of spousal benefits was changed on 5/1/2016, so that part of the article is no longer correct. NASI is negligent in leaving the article posted as-is.