Why Delaying Social Security Doesn’t Provide an 8% Return

One of the most commonly given reasons for delaying Social Security is that doing so “provides you an 8% return.” But that’s just not true. It doesn’t.

Firstly, the increase in benefits from delaying is not 8% for most years. By delaying from 62 to 70, you get about 76-77% more per month than you would get if you started your benefit at age 62. (The exact percentage depends on whether your FRA is 66, 67, or somewhere in between.) That works out to an average annual increase of about 7.4%. For the exact details of how your filing age affects your retirement benefit, see here.

The second and more important issue though is that this figure is not a return. To know the actual return you would get from delaying Social Security, we’d have to know how long you will live (and how long your spouse will live, if you’re married).

To explain, consider this hypothetical example: you give me $100 today, and I give you $8 one year from now.

What return did you get? It’s not 8%. To have earned an 8% return you would have had to go from $100 to $108 over that year. Instead, you went from $100 to $8. That’s a -92% return.

Now, imagine instead that you give me $100 right now, and I give you $8 one year from now and another $8 the year after that. Now you’ve gone from $100 to $16. Still not good, but quite a bit better. A higher rate of return.

Point being: You need to know how long you will collect this income in order to calculate a rate of return.

With regard to delaying Social Security, we can calculate an expected return based on life expectancies. But that figure turns out to be nowhere near 8% in most cases. For an average unmarried male, the expected return from waiting to file for Social Security works out to about 1.8% above inflation. For an average unmarried female, it’s about 3% above inflation. For a married person, it depends on the difference in ages between the two spouses as well as the difference in primary insurance amounts. (In short, it’s usually significantly higher for the higher earner in the couple and lower for the lower earner in the couple.)

Still, a majority of people (as in, “more than 50%” — not “almost everybody”) will be well served by waiting. Specifically, the higher earner in married couples should usually wait all the way until 70. Most unmarried people will want to wait (though not necessarily all the way until 70). And some lower earners in married couples will want to wait — though it’s pretty uncommon for age 70 to be the ideal choice there.

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