Retirement & Financial Planning Report

Delaying Social Security as Form of Annuity

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Delaying the receipt of Social Security beyond the point an individual is first eligible can be seen as a form of annuity, and one that in that light is attractive in view of the rates of return in the present economy on those types of investments, according to the Center for Retirement Research at Boston College.

It said that traditionally retirees have three options regarding what to do with their retirement savings: first, put savings in safe assets that preserve the value of principle and live off the interest; second, invest in a diversified portfolio and draw out an income on the earnings; or third, buy an annuity, which converts the savings into a lifetime income stream.



"In addition to these three traditional options, households could use their savings to 'buy' an annuity from Social Security: they could delay claiming their Social Security benefits to get a higher monthly benefit at an older age, using their savings in the interim to pay current expenses," it said. "The savings used is the 'price' and the increase in monthly benefits is the annuity it 'buys.'"

It noted that Social Security benefits can be claimed at any age after 62, with an increase in benefits for waiting, up to age 70 after which there is no additional benefit. For example, if benefits would be $1,000 a month if claimed at 65, they would be $1,071 if claimed at 66 and $1,410 if claimed at 70.

A retiree could use retirement savings to pay for living expenses during the delay. That means that money would not be available for other purposes, but the effective return could make the option attractive.

"For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66 – $860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate – the additional annuity income as a percent of the purchase price – would be 6.7 percent ($860/$12,860)."

Such a rate is higher than the rate of return on commercially available annuities, which have profits priced into them and which often pay lower returns because purchasers have longer than average lifespans, it said.

The effective rate of return from delaying Social Security benefits is also higher than current fixed income investment returns or standard recommended drawdown rates of mixed portfolio investments, the analysis said. "While buying an annuity from Social Security is a generally attractive option, it is especially attractive when interest rates are low, as they are today. Living on the interest today is essentially impossible, as interest rates on safe assets are currently less than the rate of inflation. Drawing an income from a portfolio invested in stocks and bonds is also less attractive, as bond interest rates are low and any increase would reduce the value of the bonds retirees hold."