A friend of mine recently started his Social Security benefits at age 66, justifying his decision because interest rates have risen recently from virtually zero to the four percent range. That made me question if the conventional wisdom still applies: This wisdom says that for most people, delaying the start of Social Security benefits as long as possible, even to age 70, is the best approach from a purely financial perspective.
To determine if that’s still the case, it’s important to understand the significance of the so-called “real” interest rate—the rate you can earn on guaranteed investments after adjusting for inflation. But inflation has also risen significantly at the same time as interest rates. As a result, real interest rates haven’t increased as much as the actual interest rates have.
When analyzing the financial advantage of a Social Security claiming strategy, it’s essential to take the real interest rate into account because Social Security benefits give you important protection against inflation. This was evidenced by the recent 8.7% increase that applied to benefits paid during 2023.
Because Social Security claiming strategy analysis is complex, I asked two experts for their views. Let’s start with Mike Piper, author of an excellent book, Social Security Made Simple. He says, “The fact that real interest rates have increased significantly over the last year does push the math in the direction of filing earlier. But the push isn’t large enough for most people. For an unmarried person, it’s still slightly advantageous to delay filing for benefits, though not as advantageous as it was in recent years. For the higher earner in a married couple, it’s still generally very advantageous to delay—all the way until 70, ideally. For the lower earner in a married couple, it’s usually not advantageous to delay.”
Wade Pfau, a respected retirement researcher and the author of The Retirement Planning Guidebook, agrees. “While the case for delaying Social Security weakens as interest rates rise, it is still quite strong,” he notes. “Long-term TIPS yields are still around 1.5%, while the 1983 Social Security reforms that created the delay credits to be actuarially neutral assumed a 2.9% yield.”
Both Piper and Pfau noted that interest rates are just part of the analysis: You also need to consider the protection that Social Security benefits provide against the risk of living a long time. Although the thought of living a long time may be appealing, it happens to be a serious financial risk that deserves your attention.
When considering when to start Social Security benefits, Piper adds, “…critically, the above is only dealing with the math of maximizing spending over the household’s “expected” lifetime(s). Delaying benefits also has the important effect of reducing longevity risk. That is, delaying filing reduces the risk of outliving your money, because delaying works out well in the live-a-long-time scenarios.”
Pfau agrees: “…people are living longer today, and for couples, the high-earner’s benefit lasts for the lifetime of two individuals. The odds of benefiting from the insurance value of delaying Social Security are much greater than 50% for reasonably healthy individuals.”
I agree with both Piper and Pfau—Social Security benefits protect against being very old and very poor. I know several older relatives and friends who claimed Social Security as early as they could, with the lowest possible benefit. Now they’re in their late 80s and struggling financially. Often these people are widows (it’s often the wife who survives the husband) and poor. If the husband has been the primary wage earner of the couple, delaying his Social Security benefit as long as possible is one way he can show his wife how much he cares for her.
By the way, Piper has developed a tool you can use to help determine the best claiming strategy given your situation. It’s called Open Social Security, and it’s an excellent, free, online system that does all the complex math for you.
The friend I mentioned at the beginning of this post happens to be single and has some health issues. As a result, it’s possible he might have made a good decision to start his benefits at age 66, considering Piper’s comment above about outliving your money.
On a personal note, I’ll be starting my Social Security benefit on May 1 of this year at age 70. It feels great to have been able to wait for the maximum longevity protection it will offer to both my wife and me. By working part time at work I enjoyed, I was able to delay my benefit and have ample time to enjoy my extracurricular activities. I earned enough through my part-time work to replace the Social Security benefit I was delaying, so I wasn’t missing out on income that I needed. My patience has paid off!