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Social security is an essential source of retirement income for tens of millions of Americans, and one of the most important financial decisions that older Americans must make is knowing when to start taking their disability benefits. social Security. Faced with a choice between larger benefits later in life and less significant benefits immediately, many choose to take their social security retirement benefits as early as age 62, the most age-old early.
The Social Security Administration (SSA) has stated that its intention to offer larger payments to those who are late in taking benefits is to make actuarially equivalent choices – which means you receive benefits. But it's an overly simplistic summary of what is actually a complex mathematical question.
Fortunately, analyst Brian Alleva, of the Office of Retirement Policy and SSA's Office of Retirement and Disability Policy, began a much more extensive research project a few years ago on the decision to claim. The findings of the study clearly show that the ideal claim decision varies depending on the investment strategy followed by a retiree. For stock investors, this usually favors claims as early as possible.
Source of the image: Getty Images.
Discount rates and social security benefits
Most age-related social security analyzes focus on how much money you will receive from social security in your lifetime. Call early and you will receive lower payments, but for a longer period. Wait, and your payments will be bigger, but you will have less. Guess how long you expect to live and you will be able to compare the results and decide which choice is likely to pay you more in the long run.
Curiously, however, most analyzes of social security benefits do not take into account the time value of money. To simplify the calculation, you will usually find comparisons based on current value benefit payments. In the language of the SSA study, this analysis assumes a real discount rate of zero, incorporating only the inflation rate to value previous payments more heavily than those to come.
Some analysts have argued that using the actual discount rate for bonds is the best way to analyze the claim decision. As social security payments look like what investors can get by buying an immediate annuity from a private insurance company and because social security is a US government financial obligation, the only way is to pay for it. use of the long-term bond rate.
However, the Alleva study sought to determine how different assumptions about the discount rate could lead to different optimal choices about when to claim social security. For investors, the results are telling, as they highlight how aggressive and conservative investors can draw different conclusions about the smartest decision.
Aggressive investors should claim earlier
The most important part of the analysis of the SSA study focuses on how the choice of a discount rate affects the age at which you can maximize your advantages. For an ultra-conservative investor who uses a real discount rate of zero, claiming 62 years is the highest up to the age of 77. Then, the ideal age reaches 66 to 80 years and 70 to 86 years. These figures are almost identical to those typically provided by the traditional business case.
However, the more aggressive an investor is, the higher these ideal ages are. When you use an actual discount rate of 2.4%, which is roughly equivalent to the typical yield of long-term bonds, the entire decision curve is shifted by about two to four years. In other words, to justify waiting beyond 62 years using the highest discount rate, one would have to have confidence in life until the end of life. 80 years old rather than 77 years old.
For those who invest primarily in equities, the actual discount rate of 6.7% generates a scenario in which never It makes sense to wait until the age of 70 to claim social security. Indeed, unless you plan to live beyond the age of 95, waiting until you reach full retirement age is below demand as soon as possible. Once you have reached an actual discount rate of 7.5%, always smarter to claim at 62.
What does the SSA study mean to you?
Few people use this type of analysis to justify taking their social security benefits quickly. This is appropriate because despite the initial intention of Social Security do not To be a source of primary income, most people do not have substantial retirement eggs that they invest.
But for those with outside investment, the SSA analysis provides useful information to evaluate this key decision. Wait to claim, and you will have to tap into your other financial resources sooner, forcing you to sell investments that would likely have yielded positive returns. Claim earlier, and you can let those investments grow longer. The more they grow up, the more likely they are to use social security to cover living expenses.
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