Dr. Wade Pfau has produced another fine article of interest to individuals who are in a position to delay commencement of their Social Security benefits. As discussed in several of our previous posts (most recently December 8, 2013), there are at least two ways to delay commencement of Social Security benefits. One can keep working, or one can retire prior to age 70 and use their accumulated savings to "bridge" the period of delay by paying themselves what they would have received had benefits commenced earlier than age 70. We have a spreadsheet to enable individuals to see how such a bridging approach could affect their total retirement spending budget.
In Dr. Pfau's article, he has determined internal annual real rates of return assuming death occurs at various ages for individuals with a Social Security Normal Retirement Age of 66 assuming commencement at age 62 vs. delaying commencement until age 70 and subsequent death at a later age. He also assumes no changes in current Social Security law. So, for example, he has determined a 3.2% internal annual real rate of return for an individual who dies the day before his 85th birthday (at age 84) resulting from his decision to delay commencement until age 70. So, if inflation is 3% per annum, this example individual who elects to delay commencement of Social Security until age 70 and use his accumulated savings to bridge the payments he would have received will be financially better off provided he does not earn more than approximately 6.2% per annum (3.2% real) on his accumulated savings and the Social Security benefits he receives.
As shown in the article, internal annual real rates of return are lower than 3.2% if the individual dies earlier than age 84 and higher for deaths occurring after 84. So, if you definitely know that you are going to live past your mid-80s, the delay strategy appears to be a good one unless you anticipate earning relatively high real rates of returns on your investments or changes in the Social Security law.
