Sooner or later almost every U.S. citizen must decide when to file for Social Security.
After working and contributing to Social Security for at least ten years, Americans qualify for early benefits at age 62. Every year that you delay provides an increased annual payout stream of about 7.3% up to age 70. Waiting to file until the current Full Retirement Age (currently 66) allows retirees to earn unlimited money without reducing their retirement income stream (though earnings do affect the taxation of the income stream). Beyond age 70, benefits only increase with the cost of living.
For example, if a 62-year-old couple qualifies for a $20,000/year SS income stream but can afford to delay filing until age 70, then their income stream begins at just over $35,000! The math surrounding the delay is complicated, and the result is sensitive to several assumptions. especially these three:
How long you (and your spouse) will live.
The return you will receive from your investments.
The rate of inflation.
This article by Michael Kitces sorts out the issues very well: How Delaying Social Security Can Trump Long-Term Portfolio Returns Or Lifetime Annuity. And here is another one from Wade Pfau: Social Security: the Best Annuity Money Can Buy. After digesting these and other resources, here is my best advice:
Set up your Social Security online account now, so you have reliable numbers.
Use an online tool, such as this Life Expectancy Tool, to determine how long a person of your age and in average health is expected to live.
Assess your health. If it is a notch or two below average for a person your age: file early. If it is average, then file at the Full Retirement Age. If it is a notch or two above average and you can afford it: delay filing for another year or all the way up to age 70.
If you are a skilled investor, who achieves annual returns 6%/year over the long haul, tilt the decision toward filing early.
If you expect much higher inflation than the historic 3%/year: tilt the decision toward filing later.
Regardless of the above, delay Social Security before purchasing an annuity.
Comparing purchase of a commercial annuity with delaying Social Security
Insurance companies aggressively market annuities to 50-year-olds and up. Here are the elements of annuities:
An annuity is a contract in which you make a lump-sum payment (or series of payments) to an insurance company to receive a regular stream of payments beginning either immediately or at some fixed time in the future.
Inflation-indexed annuity means the yearly payouts are inflation-adjusted.
Immediate annuity means the payment stream back to you begins immediately. Deferred annuity means the payout flow begins at a future, defined date.
Lifetime annuity means that payments last until the purchaser(s) dies.
Survivor benefit means that when the first spouse dies a reduced benefit continues to the remaining spouse until they die.
In concept, delaying Social Security is very similar to purchasing a commercial annuity. To delay SS means you must use money from your investments (or continue working longer) to pay living expenses. Alternatively, you could use that money to purchase an annuity. But if you run the numbers you will conclude that delaying SS offers a much better return.
So, before spending money on an annuity: delay social security. If you want a larger income stream than you can get from delaying Social Security, then shop for an annuity.
Social Security's security
Some people worry that the SS system will run out of money after 2033. I expect the U.S. government to fix the SS financing problem before then. But even if they don't, economists estimate that retirees should still receive at least 70-80% of their SS income stream.
Additional Social Security links
There are countless scenarios other than a long-time married couple where only one has accrued significant SS benefits. So you'll need to analyze your situation. Fortunately, the world is full of Social Security resources to help you do this. Here are a few I've found helpful:
A book by Michael Piper: Social Security Made Simple. If you only have time to read one book on Social Security, this is it. The book is very simple, excellent, and well indexed. Part 3 is most pertinent to the trade-offs of delayed filing.
To learn more about how to calculate benefits, check out this Oblivious Investor article, by Mike Piper (7/20/2012): How Social Security Benefits are Calculated.
"How Delaying Social Security Can Be The Best Long-Term Investment Or Annuity Money Can Buy" is a web article on Kitces.com. It's by Mike Kitces, 4/2/2014. Here's the web version; here's a pdf version.
Forbes article by John Wasik (8/14/2013): Five Reasons Why the Social Security Retirement Program Needs to Live Long and Prosper. In addition to some great insight, this article also addresses what it may take to solidify our Social Security system for the long term. It's an encouraging read.
Inflation, markets affect Social Security claiming decision. An article by Mary Beth Franklin in Investment News (9/2/2014).
Maximize My Social Security ($40 for 1-year subscription). This one looks more robust than the free one. You can find an example of the kind of analysis it provides by clicking here, and then clicking on the Individual User Report button.
All the best, Tim
This post is part of the Personal Finance > Retirement section of my site.