New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 9,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Misconceptions About Delaying Social Security

Quick news note: Tomorrow at 3 p.m. Eastern, I’ll be participating in a video discussion (hosted by Karen Damato of The Wall Street Journal) about retirement planning for millennials. Sheryl Garrett of the Garrett Planning Network will also be participating. If you’re a millennial with questions about saving for retirement, please join us — you’ll be able to submit your own questions for us to answer.

Here’s the page where the discussion will take place. (Click the “RSVP” button on the right-hand side of the page if you want an email reminder.)

There are many common misconceptions about Social Security planning, but two that I see pop up very often are the ideas that:

  1. Delaying Social Security is like buying a bond that pays 8% interest, and
  2. Delaying Social Security gets you an 8% return.

Social Security: Not a Bond

I’ve seen several writers make the case that delaying Social Security is a good deal, because it’s like buying a bond that pays 8% interest per year, adjusted for inflation. But Social Security makes for a very strange bond, doesn’t it? You cannot sell it. It pays nothing at maturity. And it matures at an unknown date in the future (i.e., when you die, or, in some cases, when your spouse dies).

In other words, delaying Social Security is not like buying a bond at all. It is, however, exactly like buying an inflation-adjusted lifetime annuity (or, if you prefer to think of this way, like buying a pension).

An inflation-adjusted lifetime annuity that pays 8% per year (or more precisely, 6.5%-8%, depending on which year of delaying we’re talking about) is still a good deal relative to what you can get on an annuity from an insurance company. But it’s not even close to the screaming-hot, nobody-should-ever-pass-it-up bargain that a inflation-adjusted Treasury bond with an 8% yield would be.

Delaying Social Security Gives an Unknown Return

A similar misconception about Social Security is the idea that delaying your retirement benefit gets you an 8% rate of return. In reality, the rate of return you get from delaying Social Security will depend upon how long you live (and, perhaps, how long your spouse lives).

As an obvious example, consider an unmarried person who chooses to delay Social Security all the way until 70, but who dies shortly before his 70th birthday. This unlucky fellow does not get an 8% return on the money he gives up in order to delay his benefits. In fact, every dollar he “invests” in this manner gets a -100% return, because he never gets any of it back.

The point here is not that it’s a bad idea to hold off on claiming Social Security. For many people, delaying benefits is quite advantageous. The point is simply that there’s no way to calculate your rate of return in advance, because there’s no way to know exactly how many Social Security checks you will collect — unless you somehow know exactly when you will die.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2013 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy