The Mailbag: "Postponing Social Security is for Suckers!"

Starting next week, I'll be tackling questions triggered by 'Double Your Social Security Benefits' that aren't already addressed in previous posts. (Many are, so take a look at the Social Security category archives.)

For now, though, I'd like to respond to some of the comments I received:

 "If you delay taking Social Security, you’ll die before you collect it."

 "If you die before filing for Social Security, you’ll get NOTHING!"

 “You don’t show what happens if by taking your S/S at 62 and investing the money until you are age 70. Not only would you have a lot of cash, with a good investment you would have better income.”

 These readers are among a vocal and often surprisingly (to me, anyway) angry minority who are convinced that postponing a Social Security application is a terrible idea – not just in some cases, but always.

My favorite group of naysayers are those who argue that the only shrewd move is to take the smaller Social Security check at 62 and invest it yourself.

One of them, who claims an MBA and says he’s “appalled” that I advise people to consider postponing Social Security, explains his own strategy:

 “Let’s say that I start drawing a $1,200 benefit at 62 and I invest that money with a 4% return for 8 years… I have $132,681 at 70. At 70, I start taking out $800 per month to match the $1,200 benefit I would now still be getting. With whatever is left in the lump sum still earning 4%.  I could have $2,000 per Month for over 20 years until 90. Then I would only have $1,200 rather than $2,000 per month and I would have controlled my money.  And I feel sure that I could get More than 4% return.” 

Oh, yeah?

Listen, guys: At 70, your Social Security benefit is 76% bigger than if you take it at 62. A $750 benefit at 62 would be a $1,320 benefit at 70 -- and that's without including annual Social Security inflation adjustments. To duplicate that growth over eight years, your investments would need to earn a risk-free 7.5% a year after taxes, investment expenses, and inflation. 

To give you an idea how hard that is, taxes, investment expenses, and inflation historically have lopped 5 to 7 percentage points off annual investment returns. To net a true 7.5%, you need to earn 12.5% to 14.5%.

The average five-year certificate of deposit currently pays 2.89% -- before taxes and inflation.

The U.S. stock market delivered a 1.59% average annual return in the eight years that ended in January 2010, according to Morningstar. International stocks returned 7.06% in the same period. Again, that's before taxes, expenses, and inflation.

Other readers are stopped cold by the longevity factor. If you postpone your Social Security application until age 70 to get a bigger check, you give up eight years of smaller checks. You don't come out ahead financially unless you live past age 78.

They’re certain most people die earlier. In fact, some of them write that most Americans die before age 70. (A few hardcore pessimists insist most of us will “drop dead” before we turn 60.)

They're wrong. Actuarial data show that on average, Americans now in their 50s and 60s will live until their mid-80s. If you’re a 65 year-old married couple, there’s an 81% chance that one of you will live to age 85, and a 58% chance that one or both of you will live to be 90 years old.

To be sure, there is a 50% chance you won’t reach the average life expectancy. What about people who die younger? “If you postpone taking Social Security and die before you’re 70, you get nothing!”

True, if you’re pushing up daisies before the first check arrives, you personally will get nothing.

But if you’re married, you might still consider it worthwhile to postpone your Social Security application if you can afford it. The reason: Your spouse gets a Social Security survivor’s benefit equal to 100% of what you were eligible for at the time of your death. If you die at 69 without ever having filed for Social Security, your widow or widower gets the benefit you didn't get -- and it will be 24% bigger because it will include an 8% annual credit for each of the three years you delayed applying for Social Security after your 66th birthday. 

Of course I agree with all of you who have pointed out that delaying Social Security isn’t an option for everyone. Many people can’t afford it. You have to be earning enough and/or have saved enough to consider it.  And even if you intend to work until you’re 66 and can afford to postpone your Social Security application, you need to consider your own life expectancy -- not based just on actuarial tables, but on your health, family history, and ‘lifestyle’. 

All I'm saying is, weigh your options carefully. Every month you delay Social Security will fatten that monthly benefit check. To learn more about the factors to consider, read my post 'Does It Really Pay to Postpone Social Security?'

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c:) Lynn Brenner, All Rights Reserved

 

Comments

[Russell Settle]

In this post, you made this remark:"Listen, guys: At 70, your Social Security benefit is 51% bigger than if you take it at 62. A $750 benefit at 62 would be a $1,320 benefit at 70 -- and that's without including the annual inflation adjustments."

Actually, an increase from $750 to $1320 is a percentage increase of 76%, not 51%.

[lynn brenner]

Lynn replies:

Thank you for the correction! My fingers flew over that pocket calculator too quickly! (And I've fixed the post as you can see above.)