This is a repost from Forbes.
After all these years of giving retirement advice and advising policy makers on retirement policy, I have come to realize the best financial advice is to delay claiming Social Security.
I am not saying that Congress should end people’s ability to collect reduced benefits at age 62. If you have no choice, then claim early. But for most of the 28 million older workers with the privilege of choice, I’d say that delaying is the best choice.
Convincing someone to delay claiming is difficult. People like lump sums. Cold hard cash. And when pressed about waiting, they may say they have a higher chance of never collecting.
Most people think they will die sooner than experts predict. On average, retired women think they will die a full 2.5 years sooner than the actuarial tables. This miscalculation will make you think delaying claiming Social Security is less valuable than it is. Because of this, the average claim age is around 63, even though benefits go up each year you wait until 70.
Many of us in the field have stories of trying to convince friends and loved ones to delay. Here is one of mine:
“Wanda, don’t collect at 62! Use the $100,000 in your 401(k) for living expenses over the next several years and then collect more in Social Security later.”
“No, I am keeping that. What if I need a heart transplant?”
For Wanda, spending down her $100,000 to delay claiming makes sense. I am assuming Wanda doesn’t have a fatal disease and doesn’t stick her head in a lion’s mouth for a living.
Now assume Wanda is making the same as the average worker. Wanda can keep her $100,000 and claim Social Security at age 62, but she will only get $1,125 a month. Or, she could delay claiming Social Security until age 70 and get a much larger monthly $1,993 from Social Security.
How would she get by in those eight years? She could spend down her $100,000 to get over $1,010 a month, just a little less than the $1,125, for eight years. But when she needs it the most, when she is older and more fragile, she will benefit from that monthly $1,993 if she can just delay.
For people born after 1960, the Social Security system boosts benefits by about 7.41% per year between ages 62-70. If you were born before 1960, it’s more generous. In 2018, a price-indexed annuity of $1,125 at age 62 is worth about $291,000. But a $1,993 monthly annuity one had to wait for to collect in 2026 is worth $307,000 today! Social Security is worth a lot, and the value should be considered when calculating how much you need.
Economists puzzle over why people don’t buy annuities even though they say they like them, especially if they think they will have a longish retirement. A 2018 study shows that 73% of respondents consider guaranteed income as a highly-valuable addition to Social Security (up from 61% in 2017) and people are less depressed and anxious if they have an annuity from a defined benefit plan rather than a lump sum to manage in a 401(k)-type plan or Individual Retirement Account (IRA).
People want simple annuities. But, the annuity product is complex with a dizzying array of details and fees, like surrender charges, expense fees, death benefit fees, etc. Vendors also price them sky-high due to adverse selection. It is no surprise people don’t buy annuities on the open market.
In short, delay claiming and get extra annuities from your valuable Social Security.
The blog was assisted by Andrew Minister who will attend MIT for graduate school next Fall.