Mention the topic of delaying Social Security retirement benefits in a group and you’re sure to get many different responses. The choice about whether to delay Social Security retirement benefits is complicated. Knowing when to claim Social Security retirement may depend on financial flexibility. Ultimately, the decision about when to claim Social Security benefits may be seen as a type of annuity trade-off.
Social Security retirement benefits are guaranteed income for eligible beneficiaries. The choice of when to claim retirement income from Social Security is really a matter of answering, “Should I wait to get Social Security retirement benefits today to increase what I receive later?” or “Do I need Social Security income today?”
Ultimately, the decision to delay Social Security retirement income benefits isn’t just about guaranteed return. It’s also about the cost of delaying them. If you delay requesting your Social Security retirement, you don’t have these funds available and can’t earn a potential higher rate of these funds in the future.
Cost of Delaying Social Security Retirement Benefits
Let’s say you’re 66 years old and you’ve reached Social Security Full Retirement Age (FRA). According to estimates derived from Social Security calculators, you’re entitled to a retirement benefit of about USD 1,000 a month:
If you claim Social Security retirement benefits now, you’ll earn USD 12,000 over the next 12 months from them.
If you delay claiming Social Security benefits for a year, you’ll earn an eight percent delayed retirement credit (DRC) of USD 1,080 a month. That’s an additional USD 80 per month over the Social Security retirement benefit you’d receive now.
If you’re mathematically inclined, you’re probably asking “How long will it take to recover the USD 12,000 shortfall if I wait? What’s the real impact of an additional USD 80 a month after that?”
You’ll break-even in 13 years. Naturally, the caveat here is that the actual delay cost isn’t just USD 12,000.
It’s because you bear an opportunity cost by foregoing a current payment of USD 12,000 today. You can’t invest the money now.
You also can’t use the USD 12,000 for other purposes to save another USD 12,000 in the portfolio. If you’re beginning to use interest, dividends, and other income from investments to pay for life’s incidentals, claiming Social Security retirement now allows you to keep investments in place or reinvest dividends and income at a more attractive rate.
Considerations of Delaying Social Security Retirement Benefits
It’s important to know that Social Security pays beneficiaries to delay claiming retirement benefits. It’s a good long-term deal because there are built-in adjustment factors, such as inflation adjustment over the beneficiary’s lifetime, delayed retirement credits, and more. Check your Social Security Statement online by opening a My Social Security Account.
Three factors drive the beneficiary’s potential benefit of delaying Social Security retirement benefits, including:
Portfolio growth rate, or time value of money
Life expectancy, or time horizon in which the benefit compounds
The decision to delay Social Security retirement benefits may work best in these scenarios:
In a low yield environment: If there’s relatively less income to forego by spending portfolio income while now when there are fewer lower risk opportunities to invest it.
In an inflationary environment: There’s greater opportunity for Social benefits to grow according to cost-of-living (COLA) adjustments.
In a long-life expectancy: If the beneficiary is likely to live many more years in retirement, the decision to delay Social Security retirement benefits gives him or her more years for these benefits to compound.
In contrast, the potential to live on the fruits of a portfolio are lessened when:
The market has no clear direction or sells off for a long period of time (poor market returns)
A hyperinflationary environment exists (when the portfolio is invested in financial assets and isn’t diversified in commodities, etc.)
Long life expectancy increases the chances of outliving one’s money
The opposite scenario is also true. If the Social Security beneficiary is likely to have a short life expectancy in a period of modest inflation and reasonable market returns, there are fewer reasons to delay Social Security retirement benefits.
Delaying Social Security Retirement Benefits as a Portfolio Hedge
The decision to delay Social Security retirement benefits can benefit investors in another important way. Even if the beneficiary spends portfolio income (especially in a low to negative opportunity to reinvest these proceeds environment), he or she is building up Social Security retirement credits at a healthy eight percent guaranteed annual return past Social Security FRA.
Even though the investor draws down some of the portfolio until requesting Social Security retirements, it’s good to know that these retirement benefits are guaranteed to eligible beneficiaries. The decision to delay can be considered as a useful portfolio hedge in that case.