What has the better return, i-Bond or delay SS?

A couple of months ago, I read an article where a financial planner said he tells his clients that “delaying SS to age 70 is the highest returning thing in your bond portfolio.”

https://www.nytimes.com/2022/04/22/business/retirement-inves…

Delaying taking Social Security benefits becomes an even more effective strategy in bumpy markets, according to William Reichenstein, head of research at Social Security Solutions in Overland Park, Kan., and professor emeritus at Baylor University.

“The best returning portion of your bond portfolio is actually delaying Social Security,” Dr. Reichenstein said. “Why do most people start as soon as they can or pretty close to as soon as they can? My strong expectation is, they haven’t learned deferred gratification.”

Is that still true now that we have the wonder of a $10,000 i-bond with a 0% coupon and a 9.62% inflation adjustment?

Would you get a better return by spending that $10,000 and delaying the start of your SS benefit by a few months?

I know the answer, but each of us has their own arithmetic.

intercst

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A couple of months ago, I read an article where a financial planner said he tells his clients that “delaying SS to age 70 is the highest returning thing in your bond portfolio.”

I bought a bond once … it was at a seminar run by the military for soon to be retired people and the guy sold it to me as the best thing ever. I finally got around to doing some research a few months later … haven’t owned a bond since.

Truth was I shouldn’t even have been at the seminar as I was in the process of starting a new job that paid me dramatically more than the Military did and the salary was tax free.

I once again confess that when Y’all discuss this stuff with lots a acronyms I have no idea what is happening and hit the Thread Ignore button. }};-D

I do understand federal pensions that arrive monthly in my bank account.

Anymouse

tim443 writes,

I once again confess that when Y’all discuss this stuff with lots a acronyms I have no idea what is happening

Same with a lot of Americans, but it financially hurts them more.

intercst

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Is that still true now that we have the wonder of a $10,000 i-bond with a 0% coupon and a 9.62% inflation adjustment?

If the person can afford to DELAY Social Security benefits for three years, the payoff is far higher than the I bond. The increase is about 8% per year of delay. So a three-year delay is 24% higher benefit forever. That beats 9.62% per year for three years when you look PAST the three-year delay period. There are no promises the 9.62% rate will continue. The 24% increase won’t change.

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<Is that still true now that we have the wonder of a $10,000 i-bond with a 0% coupon and a 9.62% inflation adjustment?

Would you get a better return by spending that $10,000 and delaying the start of your SS benefit by a few months?>

If this is an “either-or” decision, it’s clearly better to delay Social Security. (e.g. if you need the $10,000 to pay bills so you can delay Social Security.)

But, if you don’t need the Social Security or the $10,000 to pay bills, these are two different investments with different objectives. Apples and oranges.

If your personal life expectancy is longer than the break-even time for delaying Social Security, by all means delay Social Security. In my case, the break-even would be age 78. Both my parents died around age 70 and I have already had double breast cancer (at age 61). So it doesn’t make sense to delay Social Security to age 70.

If you want the absolute certainty of your cash buying power keeping up with inflation and you don’t want the chance of a down market when you need the money, the I-bond is a good choice.

Setting up false choices with no background information is thoughtless. Just because you like to poke fun at the I-bond. It’s getting old, intercst.

Wendy

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Interestingly, for couples with asymmetric SS earnings it is almost always better for the high earning spouse to delay but the lower earning spouse to collect as soon as possible.

More generally, the key distinction to recognize is that when couples have substantively different benefits and are considering the breakeven periods, delaying the higher earner’s benefit will win as long as either person is alive at the breakeven, but delaying the lower earner’s benefit will only win if both of them are alive at the breakeven point.

As shown below, the odds (based on the Social Security 2010 period life table) that both members remain alive for their 80th birthday is less than 50%, but the odds are more than 50% that at least one of them will remain alive until age 90.

https://www.kitces.com/blog/why-it-rarely-pays-for-both-spou…

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If the person can afford to DELAY Social Security benefits for three years, the payoff is far higher than the I bond. The increase is about 8% per year of delay. So a three-year delay is 24% higher benefit forever. That beats 9.62% per year for three years when you look PAST the three-year delay period. There are no promises the 9.62% rate will continue. The 24% increase won’t change.

While I agree that, if possible, delaying SS for 3 years, clearly beats an I-bond, this analysis above is faulty. That’s because:

  1. forever” is not accurate. It’s only until you die.
  2. It’s not actually 24% versus 9.62% + whatever rates will be afterward. That’s because you also have to account for the fact that there is no SS for 3 years, followed by (remaining lifespan - 3 years) of 24% higher SS.

For an accurate comparison, you would have to make the appropriate assumptions, then make a table of cashflows, and then calculate the IRR of all the cashflows and compare the two, or more, cases. That’s how people do the SS calculation - if they will die at 77, and they do the two cashflows, taking SS on schedule “wins”. But if they will die at 79 or older, delaying the SS “wins”. And if they live till 95+, they win big!

I-bonds will never EVER beat most other alternatives, including delayed SS, because I bonds (right now) are specifically designed to have zero real return! The whole discussion of I bonds isn’t really about a long-term investment, but rather about a place to park cash that would otherwise be in a bank account, a money market account, or a CD. For example, if a person has 5 years of expenses in cash, right now, it would be advantageous to have a 5 year ladder of I bonds to place that money into. Every 5 years, you either keep the I bond going, or cash it in, depending which is most advantageous at the time. But that’s only because I-bonds yield [a lot] more than money markets, savings account, or CDs right now.

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Every 5 years, you either keep the I bond going, or cash it in, depending which is most advantageous at the time. But that’s only because I-bonds yield [a lot] more than money markets, savings account, or CDs right now.

Exactly! They’re not a long-term investment. The i-bonds I bought 25 years ago lagged the S&P500 by a wide margin. Fortunately they’re less than 1% of assets for me.

intercst

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WendyBG analyzes,

If your personal life expectancy is longer than the break-even time for delaying Social Security, by all means delay Social Security. In my case, the break-even would be age 78. Both my parents died around age 70 and I have already had double breast cancer (at age 61). So it doesn’t make sense to delay Social Security to age 70.

Absolutely! If you have the financial planning “benefit” of a medical diagnoses that portends a shorter lifespan, by all means use that information to inform your claiming decision.

But most people don’t have that “benefit”. The Social Security Administration tells us the the 8% per year benefit boost for delaying is “actuarily neutral” (i.e., whether you claim early or late, the SS Administration will pay out the same amount over the “average” beneficiary’s lifespan.)

But we also know that people in the Top 20% of the income/wealth pyramid live 4 or 5 years longer than average due to access to better medical care and a healthier lifestyle. There’s profit to be made there for those than understand how insurance works.

A for-profit life insurer would jack the premium you pay for an annuity to cover the cost that wealthier people live longer. This is called the “adverse selection” charge.

Social Security doesn’t do “adverse selection”, so if you understand that and are in the upper income brackets, you can pocket the “adverse selection” premium for yourself by waiting.

It’s one of the big reasons that waiting until age 70 allows you to “buy” an inflation-adjusted life annuity at about 1/2 the price a commercial insurer would change. That’s not the kind of money I’d leave sitting on the table.

intercst

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1. “forever” is not accurate. It’s only until you die.

True. But that is your personal “forever” (everyone has one).

2. It’s not actually 24% versus 9.62% + whatever rates will be afterward. That’s because you also have to account for the fact that there is no SS for 3 years, followed by (remaining lifespan - 3 years) of 24% higher SS.

For the sake of this discussion, my presumption is 9.62%/yr for three years. It may go up a bit, but will more likely go down as inflation is controlled (or not). That cash is earning 9.62% each year, so you end up with maybe a 30% net return over three years. However, that is where it stops. Not because I say so but because this is for three years. Even if inflation does not go down, I bonds have a trailing interest rate determination–which means you lose a little to inflation every six months (even during the 3-yr waiting period to hit age 70). Nor can you withdraw that I bond cash, because if you do, then the increase in Social Security benefits becomes the clear preference over the I bond. Also, you CAN start to take benefits BEFORE the full three years have passed–but you WILL receive an 8% higher benefit for life for each year of delay (approx 0.66% per month benefits are delayed). After three years, your Social Security income is 24% higher–and does not go down (which an I bond can do). Social Security is indexed to inflation, albeit very poorly, because they use the wrong COLA index. They use a COLA for suburban workers that significantly under-estimates the real COLA for seniors/disabled people in order to save money.

The premise accepted is a simple one: You will live long enough to benefit from the higher payments rather than starting them earlier. Otherwise, this discussion is pointless.

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A for-profit life insurer would jack the premium you pay for an annuity to cover the cost that wealthier people live longer. This is called the “adverse selection” charge.

Way back in the (1960s?), the federal govt allowed private insurers to sell private policies with the same benefits as Social Security. The policies “disappeared” very quickly after introduction.

Actually, private insurers have different ways of avoiding long/big payouts. We see it all the time on TV, in the commercials for life insurance without having to get a medical checkup. Insurance companies limit the total payout AND they limit the duration of benefits (i.e. between ages 55-85, for example). With a reasonably defined group and mortality tables, the insurance company almost CAN’T lose money.

With a reasonably defined group and mortality tables, the insurance company almost CAN’T lose money.

So long as USA continues to teach math beyond a basic level only when free of practical application. E.g. no real applied statistics.

david fb

jerryab2 writes,

A for-profit life insurer would jack the premium you pay for an annuity to cover the cost that wealthier people live longer. This is called the “adverse selection” charge.

Way back in the (1960s?), the federal govt allowed private insurers to sell private policies with the same benefits as Social Security. The policies “disappeared” very quickly after introduction.

Sure, a for-profit insurer could never match the SS Administration’s price.

It’s probably a measure of the population’s general decline into innumeracy, that health insurers are able to convince about 1/3 of SS beneficiaries that Medicare Advantage (and having 12%-15% of your benefit lost to insurance company bureaucracy and Executive Compensation) is a good idea.

intercst

I’m married with two SS streams, one high and one low. We’re delaying the larger because the annuity aspects are comforting and appealing, but taking the lower stream early based on running the numbers.

What surprised me is all the breakeven calculations assume you make no money on the distributions. If you use something reasonable (inflation + 6.5%), you should take your SS as soon as you’re eligible. I don’t understand why this is never addressed.

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What surprised me is all the breakeven calculations assume you make no money on the distributions. If you use something reasonable (inflation + 6.5%), you should take your SS as soon as you’re eligible. I don’t understand why this is never addressed.

Yes, if you wait until age 70, the assumption is that you’re spending your SS benefit for annual living expenses rather than investing it after age 70. From age 62 to 70 it’s reasonable to assume a safe rate of return on those 8 years of delayed SS benefits, say the return on a 5yr FDIC insured CD. Could I make more by taking SS at age 62 and investing it in Saul stocks or crypto? Possibly, but it’s not guaranteed. Thus not an apples to apples comparison.

Personally, whether I take SS early, late, or not at all, isn’t going to affect my level of spending in retirement. It’s an asset allocation decision. It makes sense to me that “delaying SS to age 70 is the highest returning asset in your bond portfolio” from what I understand to be the value of an inflation-adjusted lifetime pension benefit. Could I make more by taking SS at age 62 and investing it? Possibly. But I’m already 95%+ stock. Do I really need a higher allocation?

You’ll find few military retirees who are clamoring for the opportunity to cash in their pension so that they can “play with the money in the stock market” for the chance at an “inflation + 6.5%” return.

intercst

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What surprised me is all the breakeven calculations assume you make no money on the distributions. If you use something reasonable (inflation + 6.5%), you should take your SS as soon as you’re eligible. I don’t understand why this is never addressed.

Ayup. I think I used a 4% return, as that is about what I was getting on divis when I ran the numbers. The break even point for waiting to 66 vs taking the reduced benefit at 62, was at about age 88.

Steve

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With a reasonably defined group and mortality tables, the insurance company almost CAN’T lose money.

And you shouldn’t want them to. They need to stay in business because they carry out important functions.

DB2

If you have not seen it this is a good website for figuring out when you should start Social Security and it is especially good for a couple.

https://opensocialsecurity.com/

It discounts future income based on current interest rates and it also factors in the probability that you will live to be each age of 71,72, … 90,91,…and so on. Not just your average live expectancy.

-bonds will never EVER beat most other alternatives, including delayed SS, because I bonds (right now) are specifically designed to have zero real return!

Unless you have low income and are in the 0% federal tax bracket they will have a negative real return after paying taxes on the inflation adjustment when you redeem them.

They are also one of the few investments that do not go to your estate at a stepped up cost basis when you die.

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It discounts future income based on current interest rates and it also factors in the probability that you will live to be each age of 71,72, … 90,91,…and so on. Not just your average live expectancy.

There is another factor which I haven’t seen included – active old age. For those of us with enough money there isn’t a problem of running out of money.

Steve mentioned that his breakeven age for taking early payments was 88. For many, the extra money would be nicer to have at 80 rather than 90. I’ve observed that my relatives and in-laws slowed down considerably after age 90.

DB2

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A for-profit life insurer would jack the premium you pay for an annuity to cover the cost that wealthier people live longer. This is called the “adverse selection” charge.

This is interesting. How do they know exactly? If they use “income” (previous year’s tax return let’s say) then someone planning on buying an annuity can arrange their previous year income to be low!