Wednesday, May 16, 2012

Extending your financial wealth by delaying Social Security

I recently reviewed William Meyer and William Reichenstein's book on how to optimize the Social Security claiming decision. I think that may have generated some interest from some soon-to-be retirees.

This is just a quick post.  They also published two articles in the Journal of Financial Planning about their research. In the article, "Social Security: When to Start Benefits and How to Minimize Longevity Risk" they discuss the issue of how delaying Social Security has the potential to extend the life of your financial wealth.  See this figure which shows the path of household wealth when Social Security begins at different ages. The basic idea is that delaying Social Security has a built in return that is bigger than you can expect to earn from your own investments. By delaying Social Security, you have to burn through your assets more quickly while you wait for Social Security to start, but then once it starts the bigger benefit allows you to spend less from your wealth. Should you live long enough, you end up better off in the long run by delaying Social Security. That is the basic idea.

Do note that the do-over option they describe in the article has been substantially curtailed since the time this article was published.




  1. The basic idea is that delaying Social Security has a built in return that is bigger than you can expect to earn from your own investments.

    This uses the word "return" in a non-standard sense. The "extra" one gets by delaying is due entirely to the "return" from other recipients dying - and thus ceasing to be paid - before you do. It has nothing to do with what one can earn on your own investments or what SSA earns on their nest egg.

    The Meyer and Reichenstein JFP article says explicitly: "For single taxpayers with average life expectancies who will not be subject to an earnings test, present value of benefits is approximately the same no matter when benefits begin." In other words, the early/late retirement adjustments are actuarially fair, though some worthwhile fiddles apply in the case of married couples.

    1. Thank you for clarification.

      My understanding is that the formulas for actuarial adjustments assumes that Social Security earns a 2.9% real return on the Trust Fund, and also you are right about the recipients dying effect allowing for higher returns than 2.9%. So yes, I used "return" in a non-standard sense, but I am trying to briefly explain the intuition for that Figure 1.

      This does apply to the issue of using Social Security more directly as longevity insurance rather than trying to maximize the expected lifetime payout.

  2. Does this factor in that with the latest Trustee's report anyone 63 or younger expects to have their benefits cuts by 25%.

    I also think you should point out that beneficiaries do not have a legal right to benefits according to the Supreme Court (Flemming V Nestor). Increasing the number of eggs in that basket probably has more risk than reward.

    1. Joe,

      Any benefit cut of that sort will probably impact a person equally no matter what age they claim. I mean it is unlikely they will lose money specifically because they failed to claim early enough. But should such cuts be phased in, that could change the calculations.

      And you are right, the Supreme Court did rule that Congress can freely change Social Security benefits as they wish. Participants do not have any property right over what they've been promised.


  3. I am grateful for the work of Meyer and Reichenstein along with others who have, for the single retiree (an aside: we need more articles that focus on single retirees), provided some rationale argument for taking SSA sooner rather than later. This is particularly helpful, because by waiting till 70 to take SSA benefits, a single person with tax deferred accounts gets hit with the RMD at 70.5 (required minimum distribution). The RMD plus a 'windfall' from SSA--sounds like a huge tax bill to me! For single folks with pensions, they'll already get hit with a Fed tax bill due to the non-inflation adjusted assessment on either 50% or 85% of their benefit. I would love to see tax reform address the RMD. Particularly if SSA is reformed, retirees will need to let their investments work longer for them and having the RMD kick-in works against that notion. I am one of those fortunate to have a pension that covers all living expenses. I also have investments in tax-deferred accounts and I will be taking SSA at 62 or 63 (I retired at 58). I think we can all agree that taxes (in the form of fewer deductions) and capital gains, will undoubtedly be going nowhere but up!