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.