Someone recently asked me to comment on this article that was recently posted on Motley Fool and Nasdaq.com. The article takes issue with analyses that conclude that one should delay filing for Social Security until Full Retirement Age (FRA) or later. According to the article, if one takes the time value of money into account, one might conclude that they should file early because money today is worth more than money delayed until a later date. Said another way, if, instead of spending their monthly Social Security check, the recipient invests their check and earns a “reasonable” 5% return on their money, the breakeven point is delayed by several years, making it better to file early. This is true especially if the filer has health issues and does not expect to live long after their FRA.
Research By the SSA
It turns out that the Social Security Administration was aware of this issue well prior to this new Motley Fool article. This dissertation, posted in 2016 on the SSA.gov website, concludes after lengthy iterations and analysis that claiming at age 62 maximizes lifetime benefits at a discount rate of 3.8% or higher for men and 4.6% or higher for women. If you are able to invest your Social Security and earn those annual returns rather than spend it, you are better off filing as soon as you can at age 62 rather than wait until FRA (67 years old in my case) to file for your monthly benefits. Instead of a breakeven of 5-7 years (which would translate roughly to Age 72 to 74), the breakeven would be several years later, making it better to file early despite receiving reduced monthly benefits.
One problem I have with this is that most people aren’t able to invest their Social Security. Instead, they spend it. If they spend it, the discount rate (or reinvestment rate) goes to 0%, meaning that the standard breakeven analysis is valid. Instead of 3.8% or 4.6% or 5%, most people do not derive any reinvestment value from their Social Security benefits because they need that money to live on.
Another problem that I have is that if one is healthy and able to work during their Age 62 to 67 years (or at least for a portion of that time), they should continue to do so because those years could be prime earning years. Instead of a time value of money discussion, it would be an opportunity cost discussion of foregoing years of earning the highest salary of a lifetime vs. filing early for Social Security. Which do you think will net you out with the most money over time? If you guessed that you would take in more by staying at work, you are correct.
Lastly, there are spousal benefits to consider. The dissertation on ssa.gov states that their analysis works for single filers but not as well for married filers. The SSA has tightened up on spousal benefits (no more File and Delay), but the decision is not black or white for most people due to their spouses.
I still advocate waiting to file until at least FRA if one is able to do so and is in relatively good health. It would require an unordinary amount of discipline to receive a monthly Social Security check and invest it and not just spend it.