Delay Social Security, Invest More or Buy an Annuity: What's Best for Retirement Income?

Blanchett shows that — as expected — the necessary breakeven returns for the early claiming strategy generally increase for those with longer expected lifespans, since such retirees would receive higher delayed benefits for a longer period of time.

“At age 85 the breakeven return averages about 7%,” Blanchett observes. “Note, age 85 is a relatively aggressive longevity planning age (e.g., in a financial plan), where ages 90 or 95 are more common.”

By age 90, the necessary breakeven yearly returns all exceed 8%, and by age 95 they are all about 9%. In the annuity scenario, the necessary breakeven returns are lower, landing at about 6% with assumed longevity of 90.

While U.S. stocks have had a long-term return that exceeded 8%, actually getting that full return would require a relatively risky portfolio with a significant level of uncertainty compared to Social Security benefits or payouts from guaranteed income annuities. Forecasted stock returns for the next decade are also lower than historical averages, Blanchett warns.

What About Married Couples?

Blanchett also runs the numbers for a married couple, finding even more of an incentive to delay claiming.

“The total benefits received decline upon the death of the first spouse, since the household would be going from two beneficiaries to one — but delayed claiming has the potential to significantly increase the level of income the surviving spouse could receive,” Blanchett observes. “This could change the decision about whether to delay.”

In the end, the largest benefits associated with delayed claiming occur when both the primary earner and their spouse have higher-than-average life expectancies — which is also consistent with expectations.

The Bottom Line

Ultimately, Blanchett writes, the decision about when to start claiming Social Security retirement benefits can have significant implications for retirement outcomes.

For most retirees who have enough assets to give them flexibility when choosing the age at which they claim benefits — and the expected longevity to consider doing so — the required breakeven return is likely to top 8% for individuals and 10% for married couples.

“The breakeven return for purchasing a life only annuity is lower than delayed claiming, typically in the neighborhood of 6% for more common longevity planning ages (e.g., age 90 or over),” Blanchett adds. “This suggests that while purchasing a life annuity can add value, delayed claiming of Social Security should likely be considered first, given the higher breakeven return.”

Pictured: David Blanchett