One of the most common discussions I have with clients is about the importance of making the correct decision about when to start taking your Social Security benefits. It is usually a wise investment to delay taking your benefits until your Full Retirement Age, or event until age 70. Well-known financial writer, Michael Kitces, in his “Nerd’s Eye View” newsletter, makes this point with a detailed analysis in a recent article. It is worth reading.
While much has been written about the inherent benefits of delaying Social Security benefits to age 70, a fundamental challenge in the real world is that the decision cannot be viewed in the abstract. The decision to delay Social Security isn’t just about the value of delaying, but also about the money that must be spent from the portfolio to sustain spending in the meantime, and/or the decision to allocate money towards delaying Social Security and not towards other fixed income investments or a commercially available lifetime immediate annuity.
Yet a deeper look reveals that when viewed from an investment perspective, the decision to delay Social Security actually represents an astonishingly valuable “investment” return, based on the internal rate of return of the cash flows that it provides over time. While it is certainly unlike other more “traditional” investments, in that its return is based not on interest rates or market performance but on the longevity of one’s life, for those who do live a long time the decision to delay Social Security can produce real inflation-adjusted returns of 4%, 5%, or even 6% for those who live into their 90s and beyond.