Study on Social Security says it pays to wait for payouts

Sometimes it pays to wait, especially when it comes to collecting retirement income.

A new study published in the Journal of Financial Planning says delaying Social Security helps combat longevity risk by providing inflation-adjusted lifetime benefits for a retiree and a surviving spouse.

The report by Wade Pfau and Steve Parrish, co-directors of the Center for Retirement Income at The American College of Financial Services, concludes that monthly benefits will be 77% larger in inflation-adjusted terms for those who claim at 70 instead of at 62.

“The actuarial factors supporting that 77% increase were designed in 1983 when longevity was shorter and interest rates were higher, suggesting at the very least that delaying Social Security and meanwhile spending down other fixed-income assets has a better than even chance of improving the retirement outcome,” Pfau and Parrish wrote in the study, Which Social Security Claiming Strategy Generates the Highest Legacy Value?

The idea that an early claiming decision provides retirees with the opportunity to invest their benefits to grow and support better retirement outcomes has grown in popularity in recent years. However, the study's authors say this thinking overlooks several important points about retirement income, most notably that “retirees may not invest this aggressively, and retirees must fund spending from assets and do not experience simple timeweighted returns.”

In other words, to generate the returns needed to beat the benefit of delaying Social Security, retirees would need to substantially raise their risk tolerance levels and set much more aggressive asset allocations.

“We find evidence using the historical data that it is uncommon for investment returns to beat the implied benefit of delaying Social Security for long-lived retirees even with relatively aggressive asset allocation strategies,” the study said.

Josh Strange, president and founder of Good Life Nova, agreed that the longer someone waits to claim Social Security, the more significant the benefit. However, in his view, the client has to live long enough for this strategy to realize its full potential.

“From a legacy perspective, it really depends on what is going on with a client's other assets. If they can leave them alone, defer Social Security and live for a long time, then absolutely, there will be a larger inheritance,” Strange said. “However, if they have to tap their other investments to bridge the cash flow gap from earlier claiming to the maximum at 70, then they will likely have less to leave behind.”

“I think the real question comes down to preference," he added. "Are you more concerned with maintaining a certain lifestyle or leaving behind a bigger inheritance? The answer is a big key in determining when to start claiming.”

Along similar lines, Rikin Patel, co-founder of Kingswood US’s Family Office, suggested that receiving benefits earlier may be the better option in some cases.

“While it’s true that starting to receive benefits at a later age may result in higher individual payments, the overall amount of the benefits received may be higher if you start receiving them earlier and have a longer lifespan," Patel said. "Additionally, receiving Social Security benefits earlier can provide a financial safety net and allow you to use the payments to cover the premiums for a life insurance policy, helping to ensure that you and your loved ones have financial security in the event of an unforeseen circumstance.”