A Social Security “Annuity Purchase”: Is Delaying Social Security More Effective than Purchasing a Deferred Income Annuity?

Abstract

This article analyzes a retirement strategy of delaying Social Security commencement past Social Security “normal retirement age” to effectively increase annuity income. Using Monte Carlo simulations for returns on a pre-tax retirement portfolio and simplified tax, marriage, and Social Security benefit assumptions, I compare three retirement strategies: 1) following the “4% rule” with retirement at Social Security normal commencement age (66), 2) delayed commencement to age 70 with forgone Social Security income replaced by portfolio withdrawals, and 3) following the 4% rule with normal retirement age commencement and purchase of deferred life annuity of equivalent expected actuarial value to the increase in Social Security that would occur if commencement were delayed to age 70. Results for the scenarios analyzed generally support delaying Social Security as a preferred method to annuitize assets over the direct purchase of a deferred annuity, particularly under the married scenario. Compared with Strategy 1, delaying Social Security increases portfolio fail rates by year 30 (age 96) by 10 percentage points (to about 20%) and results in reduced portfolio values across outcomes. The trade-off is increased inflation-protected income under portfolio failure scenarios by 32% of the primary benefit.