NCPA - National Center for Policy Analysis

It Pays to Delay Social Security

April 25, 2003

In recent years, nearly 70 percent of retirees took Social Security before age 65, thus accepting a permanent reduction in their monthly benefits. Did these retirees make a mistake? Researchers say it is worth delaying retirement until age 65 if you believe you will live until at least age 84.

When deciding when to take Social Security, you shouldn't just consider your likely longevity. You also need to give some thought to what investment returns you might earn:

  • If you retire at age 62 and take Social Security right away, you won't have to withdraw as much money from your portfolio in the early years of retirement.
  • Instead, you can leave that money to collect investment returns -- the higher those investment returns, the smarter it is to claim benefits early.

To understand how this trade-off works, consider a study by Thomas Walsh, a research fellow at New York's TIAA-CREF Institute. Walsh looked at the choice for those born in 1940. For these folks, the full retirement age is 65 and one-half years, but they can apply at 62 and receive benefits that are 22.5 percent lower.

  • In his study, Walsh assumed that retirees could earn 9 percent a year on their investments before tax and 7.2 percent after tax, while inflation runs at 3 percent.
  • Today, 10-year Treasury notes are yielding around 4 percent.
  • If your investments earn less than 9 percent a year, which seems likely, the break-even age will be earlier than age 84.

At a 9 percent before-tax return, the early retirees would break-even at age 84 -- and thereafter lose out, compared to the benefits they would have received by waiting.

Source: Jonathan Clements, "Why It Pays to Delay: Too Many Retirees Start Collecting Social Security Early," Wall Street Journal, April 23, 2003; Thomas G. Walsh, "Electing Normal Retirement Social Security Benefits Versus Electing Early Retirement Social Security Benefits," July 2002, TIAA-CREF Institute.

For text (WSJ subscription required),,SB10510354627380300-search,00.html


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