How Long Should An Individual At Full Retirement Age Delay Receiving Social Security Benefits?

Abstract

n important topic for many individuals approaching 66 in 2011 is whether to start social security benefits at full retirement age (FRA) or to delay the benefits in order to gain greater payouts in the future. In 2009, the bonus for delaying the start of benefits rose to about 8% per year. By delaying benefits for four years (to age 70), it is possible to increase benefits by 38 to 55 percent per month for the remainder of the retirees life. In addition to the higher monthly benefits from delaying start of benefits, there are also substantial benefits for high income retirees in relocating to lower tax states. Also, given that the remaining age to death for most retirees at FRA is clearly finite, one would expect to see some value in discounting future earnings.

Our paper evaluates accumulated benefits over a 25 year time horizon to assess retirement decisions post FRA. We consider three examples of accumulated benefits: (1) constant dollar accumulated benefits without discount or taxes; (2) alternative rates of discount of the future stream of earnings without income taxes; and (3) discounted after tax benefits. Each scenario is evaluated to assess whether delaying social security benefits past FRA is a profitable idea. Based upon our analysis, any discount rate in excess of 5% of the available after-tax returns provides no breakeven age within expected life ages. That is, at high discount rates, it is always better to start benefits at FRA or with only short delay once FRA is reached, if the individual wishes to maximize accumulated benefits over the expected life.

At discount rates of less than 3%, the accumulated benefits may be increased within the expected life span by delaying the start of benefits. If no discount rate is applied, accumulated benefits are maximized by delayed start since all breakeven ages occur within life expectancy. In addition, we find that the negative impact of taxes on accumulated benefits can be as large as a discount rate of 3% on accumulated benefits. For high income retirees, a strategy of (1) relocating to lower tax states and (2) delaying the start of benefits can provide substantial increases to accumulated benefits. Finally, we note that the retirement decision is not entirely financial, but that many factors including family, spouse, work climate, health, expected life span, and fear of running out of money lead individuals into making decisions that may not optimize the present value of future benefits.