Social Security cards © iStock

Dear Dr. Don,
Why does everybody say “Wait to take Social Security so the monthly payment in retirement will be larger”? If you compare taking the benefit early to waiting to file for benefits, the break-even point for total benefits paid out is about 10 to 12 years. If you do not need the money at age 62, I say take it and invest it. Let’s ignore, for the moment, taxes and cost-of-living adjustments while investing with a 4% return at age 70.

Such an investor would have a sufficient balance at age 70 to supplement the smaller Social Security payment, and it would be equal to what the worker would get if he earned delayed retirement credits and filed for benefits at age 70. I don’t hear experts ever discussing the total benefit break-even points or the investing strategy.
— Em Earnings

Dear Em,
Let’s try to get you on track. That begins with a premise based on something factual. Income taxes and the cost-of-living adjustments must be considered when choosing a strategy for the timing of your Social Security retirement benefits.

You can look to maximize payments received from Social Security, but numerous academic research papers point out that the “present value” of the total benefits paid out are about the same, regardless of when you start receiving them. Present value is a finance concept that considers the time value of money — which is the focus of your letter.

Turning to an expert…

I spoke with Bill Meyer of Social Security Solutions, who tells me the best interest yield to use when considering the time value of money for Social Security payments is the yield associated with Treasury’s inflation-protected securities, or TIPS. The actual rate is nowhere near the 4% number you cited. You could choose to take additional investment risk by investing in stocks or other investments. If we are talking about additional risk, then that makes this the proverbial apples-to-oranges comparison.

Which Social Security strategy makes the most sense? It depends on whether you’re single, divorced or married, and also on the health and life expectancy of you and, if married, your spouse.

A variety of risks

Besides trying to maximize the payments from the government, you would want to protect against longevity risk, or the risk of outliving your income.

A 2010 paper that appeared in the Journal of Financial Planning by William Meyer and William Reichenstein, “Social Security: When to Start Benefits and How to Minimize Longevity Risk,” provides ideas on which strategy might be appropriate for different people.

It explains that single people who expect to live the average number of years get the same present value of benefits no matter when they begin. Single people with shorter life expectancies should take benefits early, and vice versa: Those with longer life expectancies should delay. Couples who want to take advantage of present value should have the lower-earning spouse take benefits as soon as possible, and the higher-earning spouse should delay until age 70.

I hope this helps you better decide when to take benefits. Here’s hoping you have a happy and long retirement!

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.