For many Americans, taking Social Security benefits to 62 years is less of a choice and more of a necessity. A large fraction of social security participants depend on the program for most of their income, and for some, their check for security is about the only income they can count on month in and out month.
However, those who & # 39; We have managed to save a healthy nest egg until retirement has several options. For them, it may be attractive to defer social security, as it allows them to receive larger monthly benefits later, and in some cases pass the higher checks to their loved ones in the form of survivor benefits. Still, it's a choice that very few social security experts are talking about ̵[ads1]1; taking insurance at 62 even if you don't really need it and investing your monthly benefits to provide more returns.
The error in most social security analyzes
Traditionally, most people who look at Social Security concentrate on the total amount of money they are likely to receive during their lifetime. This is partly because Social Security itself has argued that the benefit formula is designed to pay out about the same regardless of when you claim benefits – provided you live up to about your actuarial life expectancy.
This approach has created pause analysis, which looks more closely at the impact of when you claim benefits. In general, if you only look at total paid dollars after adjusting for inflation, traditional breakeven analysis concludes that living through the late 70s or early 80s is the typical time when delays in benefits begin to pay off . Here is an example, based on someone who had earned a typical $ 1400 per month benefit at full retirement age of 66 1/2:
But the problem with traditional breakeven analysis is that it does not reflect the time value of money. It may not mean much to the many pensioners who need to use the insurance as soon as they receive it. However, for those who can invest their benefit checks, the time value of the money makes a big difference because investing early benefit checks provides a longer time horizon for investment growth.
What a difference a positive return makes
Even modest return assumptions can make a significant difference in your analysis of when to claim insurance. For example, say you were ultra-conservative and wanted to spend your money on bank CDs. Right now you can get long-term CDs that pay around 2% in annual interest. If you do, here's what happens to the graph above:
As you can see, the dates of the break are moving out a bit, with the earliest being around 81 years and the last around 84.
Put in more ambitious return goals, and things get even more exciting. Here is the graph for a 7% annual return:
The lines begin to converge, but even at the age of 100, they do not have the case is not affected. Claiming early gives you sustained leadership, and claiming that you never catch up later.
Some Warnings to Consider
The graphs above can convince you that claiming early is always the way to go. But there are many more factors to consider, including these:
- The graphs above make the unrealistic assumption that returns will be consistent and consistent. In the real world, markets are often unstable, and a bad time for the bear market can make this analysis look a lot different.
- Taxation of Social Security benefits and loss due to work before reaching full retirement age can reduce what you actually receive if you claim early and bring that line to the graph.
- If a spouse or child wants to collect survivor benefits on your employment record after your death, the overall impact may be different.
Still, for those who have the financial resources to invest their insurance, considering the time value of money is a worthwhile exercise. You may not end up changing your requirements because of it. But in some cases it can make a big difference in your overall financial well-being when retiring.