Social Security: Two ways of looking at the investment

Discussions about delaying Social Security benefits always treat the increase in monthly payments as an investment that has grown 8 percent per year. But this isn’t really an 8 percent return because to get the increase, you lose the benefit payments you’d have received in the meantime. You must live at least 12 years after getting your first benefit check to break even. It’s not until then that you start earning a return on the delay. Am I missing something?

It depends on how you look at this investment.

As you say, when you postpone Social Security to collect a larger amount at 70, you forgo a smaller monthly benefit in the meantime. How long you must collect that bigger benefit before you’ve received an amount equal to the amount you passed up depends on your assumptions about interest rates, taxes and inflation — but you’re right that it could be 12 years or more.

People typically must tap their savings to meet living expenses while postponing Social Security from age 66 to age 70. That’s why advisers compare the risk-free, inflation-adjusted 8 percent annual credit you earn for delaying Social Security until 70 to the return you’re likely to earn on your savings, which isn’t risk-free or inflation-adjusted.

Maybe you should think of the savings you spend while you postpone Social Security as premium payments for a deferred annuity that will provide lifetime income to you and your spouse. You’re buying an inflation-adjusted annuity that will pay the difference between your benefit at 66 and your benefit at 70. If you compare what you pay for that extra monthly Social Security income to the cost of a commercial inflation-adjusted deferred annuity on two lives, you’ll find it’s a bargain.

THE BOTTOM LINE Social Security is the best annuity you can buy.

WEBSITES WITH MORE INFORMATION nwsdy.li/annuity and nwsdy.li/delay

TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747-4226, or email act2@newsday.com Questions can only be answered in this column. Include your name, address and phone number. Advice is offered as general guidance. Check with your own advisers for your specific needs.