Which is the Optimal Strategy? Deferring Commencement of Social Security, Buying a QLAC or Neither?

Note: See post of February 9, 2016 for further discussion of this post

Apologies again to my non-U.S. readers as I’m going to dive back into the “should you delay commencement of your Social Security benefit” debate again.  This post is a follow up to my posts of October 24, 2015, “Does New Math Clearly Demonstrate that People Should Delay Commencement of Social Security Benefits when Possible?”, September 25, 2015, “Another Look at Deferral of Commencement of Social Security Benefits”, and April 16, 2015, “Delaying Social Security Benefits vs. Buying a QLAC—Which is the Better Strategy?”

When we last discussed this subject, I took issue with the claim from Dr. Wade Pfau that “the math is clear:  People should delay claiming when possible.”  In this post, I will again take the position that the math is not as clear to me as it is to Dr. Pfau and to most retirement experts who tell retirees what is best for them.

I’m going to do the math for four alternative strategies for a 65-year old single male (with a Social Security Normal Retirement Age of 66) who has quit working and is eligible to commence his age 65 Social Security benefit of $20,000 per year.  He also has investments of $400,000 and no other retirement assets.  To do this math, I’m going to use the very simple Present Value Calculator I posted on the website last month.  Feel free to check my calculations or model different assumption sets.  The simple present value calculator uses annual payments which are assumed to paid at the beginning of each year, so it overstates calculated present values (for all four alternatives) slightly.  For all the calculations, I will be assuming inflation of 2% per annum and an interest discount rate of 4% per annum. 

Here are the four alternative strategies:

1. Commence the $20,000 per annum benefit immediately at age 65. 
2. Defer commencement of Social Security benefits until age 70.   The benefit commencing at age 70 under current Social Security law and the 2% inflation assumption would be $31,230.  This amount is equal to his age 65 benefit increased by a factor of 1.414286 for delayed commencement and a factor of 1.104081 for five years of expected 2% per annum cola increases.  
3. Same as Alternative 1 except take $100,000 of accumulated savings and buy a Qualified Longevity Annuity Contract (QLAC) commencing at age 80 with no pre-commencement or post-commencement benefits.  Based on today’s quote from Immediateannuities.com, a premium of $100,000 would buy a monthly fixed dollar life annuity of $2,627, or $31,524 per annum commencing at age 80 and payable for life thereafter. 
4. Same as Alternative 1 except take $100,000 of accumulated savings and buy a QLAC commencing at age 85 with no pre-commencement or post-commencement death benefits.  Based on today’s quote from Immediateannuities.com, a premium of $100,000 would buy a monthly fixed dollar life annuity of $4,407, or $52,884 per annum commencing at age 85 and payable for life thereafter.
   

The table and graph below show the present values at age 65 of the hypothetical retiree’s retirement assets (accumulated savings plus present value, if any, of Social Security benefits plus present value, if any, of expected payments under the QLAC contract) for various assumed ages at death for the four alternative strategies.  Because a retiree’s assets also equal his liabilities, the present values shown below also equal the present value at age 65 of his future spending and amounts to be left to heirs. 
   

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We see from the table and graph above that the present value at age 65 of the retiree’s assets increases with assumed age of death for all four strategies.  Which is the optimal strategy?  Well, that depends on the retiree’s age of death.  If he dies before age 85, he is better off under the commence immediately with no QLAC alternative.  If he dies on or after age 85 and before age 88, he is better off under the defer to age 70 strategy.  If he dies on or after age 88 and before age 95, he is better off under the commence Social Security now and buy a QLAC commencing at age 80 strategy, and if he dies on or after age 95, he is better off under the commence Social Security now and buy a QLAC commencing at age 85 strategy.

Of course, no one knows when they are going to die (a theme from my last post), and even if we did know, age at death would not be the only factor in a decision of which alternative to select.  Readers can revisit some of my prior posts for a discussion of some of these other factors.  My point in this post was to demonstrate once again that the math on this issue is not as clear as we have been led to believe.