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Does Delaying Social Security Deliver an 8% Return?

Waiting often makes sense, but your actual mileage may vary.

"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?

Not exactly. Yes, delaying Social Security often--even usually--makes sense, especially if you or your partner have reason to believe you'll have an above-average life expectancy. While a majority of people in the United States claim Social Security when they're first eligible, at age 62, waiting can bear fruit: For every year you delay up until age 70, you pick up an increase in your benefit.

But Mike Piper, author of the book "Social Security Made Simple" and "The Oblivious Investor" blog and the creator of the free Open Social Security calculator, argues that it's misleading to call that a "return." Yes, you can pick up an increase in benefits for delaying: If you delay from age 62 to 70, that translates into average annual benefits increase of 7.4% per year.

In order to know the actual "return" you receive from a decision to delay Social Security, however, you'd have to know how long you'll live. If you delay your benefit and live a long time (or your spouse does, if you're the higher earner), your enhanced benefit is magnified and your "return" from that decision to delay is higher. If, on the other hand, you delay filing and die shortly thereafter, your "return" from delaying is negative; you would have been better off starting benefits earlier.

A Good Starting Point The Social Security Administration's Retirement Benefits Calculator allows you to compare your estimated benefits based on various anticipated start dates, using your actual earnings history. To use the calculator or access any of your own Social Security data online, you'll need to have created a My Social Security profile. If you haven't checked your profile recently, be aware that the site now requires two-factor authentication; you may need to reset your password.

The Retirement Benefits Calculator clearly depicts the pickup in benefits to be gained by delaying: On my own profile, I can see that my estimated monthly benefit at age 62 is almost half that of my benefit at age 70. My estimated benefit at my full retirement age of 67 is roughly in between the two.

Why are these "estimates" rather than the real thing? There are a few reasons. The big one is that Social Security benefits are based on your highest-earning 35 years of work, and Social Security doesn't know what the years between now and retirement will hold. (You could become unemployed or your earnings could skyrocket.) Social Security benefits are also inflation-adjusted, and we don't know what inflation--and in turn actual benefits--will look like in the future. Finally, the Social Security's site makes no secret of the fact that that promised Social Security benefits could change secularly. ("Your estimated benefits are based on current law. The law governing benefit amounts may change. Congress has made changes to the law in the past and can do so at any time.")

A More Customized View The Social Security Administration's calculator is a good first step when contemplating different filing decisions, especially because it harnesses your own earnings history. But it's also worthwhile to take into account even more elements of your own situation, especially if you're part of a married couple. That's because the name of the game with Social Security is to enlarge the lifetime payout from Social Security for both spouses, not just for each partner in a vacuum. The higher-earning partner in a couple may not believe she has an above-average life expectancy, so delaying may not seem advisable based on her life alone. But if her spouse is younger and/or likely to live longer than the average life expectancy, she may want to delay filing because her partner will receive that enlarged benefit throughout his long life.

To help factor in some additional considerations, including marital status and life expectancy, I test-drove Mike Piper's free Open Social Security calculator. (The calculator works best on Google's Chrome browser.) The basic version of the calculator requires that you enter just a few variables: birth date, marital status, gender, and primary insurance amount, or PIA, which you can find if you've created a My Social Security profile. The calculator then provides you with a "proposed solution": an ideal target start date, along with the present value of the anticipated lifetime benefits and a year-by-year look at the annual benefits that would accompany filing at that date. You can then compare that proposed solution with alternate start dates. If you're part of a married couple, you'll receive two proposed start dates.

The advanced version of the calculator (available by checking the "Advanced Options" box at the top of the page) allows for more customization, and here's where things get even more interesting. Notably, the tool allows you to tweak the life expectancy table used for you and your spouse, as well as your anticipated retirement dates, how much you expect to earn between now and retirement, and what rate of return you can expect from any benefits you take and reinvest. (Piper argues that it's wise to play it safe and use Treasury Inflation-Protected Securities as a proxy for expected investment return, because both "investments" are backed by the U.S. government and provide inflation protection. I agree.)

You can also factor in potential benefit cuts to Social Security if you choose to do so. This section allows for customization, too, but the default is a reasonable one: a 23% reduction in benefits beginning in 2034. Additionally, the advanced version allows users to factor in different situations: divorce, widowhood, and disability, for example.

Testing the 'What Ifs' I test-drove the advanced version of the calculator using various scenarios for my husband and me, employing different life expectancy tables and anticipated retirement dates, for example. The calculator generally corroborated the strategy that we have long been planning; that delaying until age 70 or close to it will probably make sense for both of us. Likewise, the calculator indicated that delaying until 70 would make sense for my sister, who's single. That's long been her anticipated strategy as well.

Nonetheless, it was interesting to observe how different adjustments led to different outcomes. When I plugged in a lower PIA for myself and left my husband's alone, for example, the calculator recommended that I start benefits at 62 and he wait until 70. And when I used the standard life expectancy for him but selected "2017 CSO Non-smoker Super-preferred" for myself, the recommendation was that I delay until 70 but that he file for benefits a touch earlier.

The calculator provides an excellent illustration of how sensitive Social Security filing is to personal variables. As Social Security is the largest retirement "asset" for the vast majority of people in the U.S., it's worthwhile to go beyond conventional wisdom when determining how best to maximize it.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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