While there have been many articles writtin about when to take Social Security, they all seem to focus on which choice will get you the most money. I believe people should be more focused on the longevity insurance benefit of Social Security. Below is a quick overview of how I try to communicate the great insurance deal the government provides.

I find that it is often the case that delaying Social Security reduces the risk of running out of money (especially for those who are being aggressive in their spending). However, I have found most people resist the idea of delaying social security benefits. This is especially true for clients retiring early. People’s resistance to delaying Social Security has two main flavors. After having paid into the system their whole life, they can’t wait to start receiving some money back. And secondly, having a paycheck in early retirement is very comforting.

Before you buy any commercial immediate annuities you should max out your government annuity because they give you a better deal. With the addition of inflation indexed annuities to Vanguard’s immediate annuity quote system, There is finally found a tool that allows me to demonstrate the great deal the government provides.

For example, imagine a single male born 3/1/1945 who plans to retire at age 62 (i.e., next month).

Social security might present him with the following options in todays dollars
$1430/mo – starting next month
$2649/mo – starting at age 70

To make an apples to apples comparison imagine he wants to create a floor on his standard of living by ensuring he has $2649/mo in inflation protected income for the rest of his life and see how each choice compares.

If he starts Social Security today, then he will need an additional $1219 in inflation adjusted income to achieve the $2649 floor. From the Vanguard site mentioned above we can estimate this cost at around $282K.

If he starts Social Security at age 70 then we just need to create a $2649/mo inflation adjusted income stream for the 8 years until Social Security kicks in. Using a bond ladder of 2% TIPS this would cost around $235K.

So by waiting to take Social Security the client saved around $47K or over a 16% savings. It is even a better deal for women because of their longer life expectancy (which makes buying a commercial annuity more expensive). And this ignores the potentially substantial income tax benefits because of the way Social Security is taxed.

Doing this analysis for couples is a bit more complicated but the same basic process can be applied. For example if one is going to get the spouse benefit of 50%, then you would use an annuity with a 66% survivor option to get the equivalent annuity commercially.

Unfortunately, since most financial advisors are compensated on commissions or assets under management, this strategy doesn’t get much emphasis.