Does it make sense to defer Social Security benefits?

For many, the answer is yes.

This is not the conventional wisdom. It says to take the money and run. But some new research indicates the conventional wisdom is wrong.

Let's start by working through an example. For anyone born in 1943 or later* Social Security benefits will rise by 8 percent for each year of deferral.

That's a hefty increase. A worker who is entitled to benefits of $1,000 a month at 66, for instance, would enjoy an increased benefit of $80 a month simply by delaying a year.

Is that a good idea? To know we need to compare it to other ways of doing the same thing.

One choice is to buy a life annuity. The website www.immediateannuity.com tells us that a 67 year old woman would need to pay $12,363 for a fixed lifetime income of $80 a month. A 67 year old man would need to pay $11,559.

So think about that.

By withdrawing $1,000 a month ($12,000 for the year) from savings instead of taking Social Security benefits, you can increase your monthly Social Security benefits for life. This is better than a private fixed annuity that costs about the same amount because Social Security benefits are indexed to inflation. To get an inflation-adjusted life annuity, were they readily available, you would probably have to invest a good deal more, nearly $20,000.

Similarly, if you took $80 a month from an investment fund of about $12,000 you'd need to make withdrawals at an 8 percent annual rate. Such high rates of withdrawal, with later inflation adjustments, could leave you broke years before dying.

According to a Trinity University study of portfolio survival**, for instance, a 100 percent stock portfolio has a 70 percent chance of surviving 15 years and an 53 percent chance of surviving 20 years at that withdrawal rate. The life expectancy range for most 67 year olds is 15 to 20 years.

Bottom line: If you use your savings to defer taking Social Security you can increase in your lifetime income more than you would by or investing the same money or buying a fixed lifetime annuity. Better still, deferral sidesteps all worries about making investment choices.

Using Economic Security Planner software, a new form of financial planning software using dynamic programming, Boston University economist Laurence J. Kotlkoff found that using 401(k) assets to defer taking Social Security from 62 to 70 would allow a relatively well off couple to increase their lifetime consumption by about xxx percent.

Then why do so many people take benefits so early? Why don't more seniors delay taking benefits?

There is a rude answer for this, of course. Necessity.

Even so, recent research at the Center for Retirement Research at Boston College indicates that we, collectively, may be moving in the right direction. In "Why do women claim Social Security benefits so early?", Economists Alicia Munnell and Mauricio Soto show that   94.1 percent of all women have claimed Social Security benefits by age 65, nearly as many as the 96.7 percent of all men. They do this in spite of the longer life expectancies of women.

But when the figures are examined more closely our behavior is more rational. Married women take Social Security benefits earlier than single women for a good reason.

Married women take their benefits early because they will eventually be replaced by the larger benefits of their spouse, who is likely to die earlier.

The Boston College research also shows that couples trying to maximize the net present value of their Social Security benefits will do so by (1) tending to have the wife take benefits early while (2) tending to have the husband delay taking benefits.

The exact ages for optimizing Social Security benefit income are determined by the relative earning power of the spouses and their age difference.

In a couple where the wife earns 40 to 100 percent of what the husband earns, for instance, the optimal ages for taking Social Security benefits are 62 for the wife and 69 for the husband, regardless of age difference.

In a couple where the wife earns relatively little, the optimal age for taking benefits is 66 for each if there is no age difference. As the age difference increases, the couple will optimize benefits by having the wife take them at 62 and the husband take them at 68.

On the web:

Age and Social Security benefit increases

The Trinity Study results on my website: see table 3

Munnell and Soto, "Why Do Woman Claim Social Security Benefits So Early?