Social Security protects against stock market crashes, inflation, and longevity risk.
A friend of mine recently started his Social Security benefits at age 66, which justifies his decision because interest rates have recently increased from virtually zero to four percent. That made me wonder if the conventional wisdom still applies: This wisdom says that for most people, delaying the start of Social Security benefits as long as possible, even until age 70, is the best approach from a social security perspective. purely financial.
To determine if that’s still the case, it’s important to understand the importance of the so-called “real” interest rate—the rate you can earn on guaranteed investments after adjusting for inflation. But inflation has also risen significantly at the same time as interest rates. As a result, real interest rates have not increased as much as real interest rates.
When analyzing the financial advantage of a Social Security application strategy, it is essential to consider the real interest rate because Social Security benefits provide you with important protection against inflation. This was evidenced by the recent 8.7% increase that was applied to benefits paid during 2023.
Two experts think
Because Social Security claims strategy analysis is complex, I emailed two experts for their views. Let’s start with Mike Piper, author of an excellent book, Simplified Social Security. He says: “The fact that real interest rates have risen significantly over the last year it does push the math in the direction of filing earlier. But the boost isn’t big enough for most people. For a single person, it is still somewhat advantageous to delay applying for benefits, although not as advantageous as it has been in recent years. For higher earners in a married couple, it is still very advantageous to delay, ideally until age 70. For the lower earners in a married couple, it is generally not advantageous to delay.”
Wade Pfau, a respected retirement researcher and author of The retirement planning guide, do you agree. “While the case for delaying Social Security weakens as interest rates rise, it’s still pretty strong,” he says. “Long-term TIPS yields are still hovering around 1.5%, while the 1983 Social Security reforms that created late-payment credits to be actuarially neutral assumed a 2.9% yield.”
Both Piper and Pfau point out that interest rates are only part of the analysis: You should also consider the protection that Social Security benefits provide against the risk of living long. While the idea of living long may be appealing, it turns out to be a serious financial risk that deserves your attention.
In considering when to start Social Security benefits, Piper adds: “…critically, the above is just about the math of maximizing spending over the “expected” lifetime(s) of the household. Delaying benefits also has the important effect of reducing longevity risk. That is, delaying filing reduces the risk of your money surviving, because delaying works well in long-lived scenarios.”
Pfau agrees: “…people are living longer today, and for couples, the benefit of high income lasts the lifetime of two people. The odds of benefiting from the insurance value of delaying Social Security are much greater than 50% for reasonably healthy people.”
Social Security protects against old age and poverty
I agree with both Piper and Pfau: Social Security benefits protect against old age and poverty. I know several older relatives and friends who claimed Social Security as soon as they could, with the lowest possible benefit. They are now in their 80s and struggling financially. Often these people are widows (often it is the wife who survives the husband). If the husband has been the main breadwinner for the couple, delaying his Social Security benefit as long as possible is one way to show his wife how much she cares.
By the way, Piper has developed a tool that you can use to help determine the best claim strategy given your situation. Is named Open Social Securityand it’s a great free online system that does all the complex calculations for you, taking current real interest rates into account.
The friend I mentioned at the beginning of this post is single and has some health issues. As a result, he may have made a good decision to start his benefits at age 66, considering Piper’s earlier comment about outliving his money.
On a personal note, I will start receiving my Social Security benefits on May 1 of this year at age 70. It feels great to have been able to look forward to the maximum longevity protection it will offer both my wife and me. By working part-time at the job I enjoyed, I was able to delay my benefit and have plenty of time to enjoy my extracurricular activities. I earned enough through my part-time job to replace the Social Security benefit I was delaying, so I wasn’t losing the income I needed. My plans and my patience have paid off!
