The following is in response to Joe Tomlinson’s article, Providing Better Social Security Advice for Clients, which appeared last week:
Dear Editor,
Tomlinson’s article makes a good case for delaying from age 62 to 70, but I wonder about the benefits over shorter periods. A 2012 study, The Decision to Delay Social Security Benefits: Theory and Evidence, suggested that single males should delay only to age 68 or 69, because the benefits for a one-year delay decline with age and are not that great for deferring from age 69 to age 70. Using general population data, it showed a chart (on page 39) for a single male at three different real interest rates: 0.0%, 1.0%, and 2.5%. At 0.0% it was a push for the single male going from 69 to 70. At 1.0% it was a push going from 68 to 69 and negative going from 69 to 70. Those rates differ from the TIPS rates that Tomlinson used and the general population mortality has shorter life expectancies than Tomlinson assumed. So I'm wondering about the age 69 versus 70 tradeoff with the assumptions used in the article.
Also, wouldn't the highly unpredictable nature of individual mortality make deferring quite risky, particularly if the returns (say from age 69 to 70) aren’t that great?
Jim Rich, CFA
Joe Tomlinson responds:
Jim makes a good point that the year-by-year results vary and the lowest return is for deferral from age 69 to 70 for single males. This is because the returns are very sensitive to remaining life expectancy, which is lower for males than either females or the last to die in couples. Remaining life expectancy is lower at age 69 than at earlier ages.
I ran my calculations specifically for a 69-year-old male using the same mortality table I used for the article, which resulted in a life expectancy for a 69-year old of 17.5 years versus 24 years for a 62-year-old. The real implied rate of return was 0.72%, just beating out today's 10-year TIPS rate of 0.56%. So, for single males, deferring from age 69 to 70 still wins, but not by a lot.
The other part of Jim’s question is about longevity risk. This will depend on individual circumstances, but for many, the risk of outliving savings and being a burden on children or younger relatives weighs more heavily than the risk of dying early and leaving less inheritance. So individuals and couples may want to focus on the best strategy to mitigate the risk of outliving savings, and that would favor delay-to-70 strategies for individuals and the older/higher earner in couples.
These are difficult decisions and clients and advisors will benefit from using software like Meyer and Reichenstein's SSAanalyzer that doesn't just show the best strategy for a single assumed life expectancy, but shows the best strategies over ranges of possible single or joint lifetimes.
