It pays to delay taking Social Security benefits

Does it make sense to defer Social Security benefits?

The answer is yes. This is not the conventional wisdom. It says to take the money and run. A fresh examination, however, indicates the conventional wisdom is wrong.

Let's start with a simple exercise. For anyone born in 1943 or later, Social Security benefits will increase by 8 percent for each year of deferral. The benefits will also increase by the cost-of-living adjustment that all recipients get.

That's a hefty increase. A worker who is entitled to benefits of $1,000 a month at 66, for instance, would enjoy an increased benefit of $80 a month -- simply by delaying a year.

Is that a good idea? Let's compare it to alternatives.

One choice is to buy a life annuity. The website www.immediateannuity.com tells us that a 67-year-old woman would need to pay $12,363 for a fixed lifetime income of $80 a month. A 67-year-old man would need to pay $11,559.

So think about that. By withdrawing $1,000 a month ($12,000 for the year) from savings instead of taking Social Security benefits, you can increase your monthly Social Security benefits for life. This is better than a private fixed annuity because Social Security benefits are indexed to inflation. To get an inflation-adjusted life annuity, were they readily available, you would probably need to invest over $15,000. (You can get quotes by checking the Vanguard Lifetime Income program online atwww.vanguard.com.)

So spending $12,000 of savings to delay taking Social Security benefits will ''purchase" a lifetime income benefit worth at least $15,000! Another choice is to take the $12,000 and invest it, taking $80 a month and adjusting the withdrawal for inflation every year. That amounts to a dangerous 8 percent initial rate of withdrawal. Such high rates of withdrawal could leave you broke years before dying.

According to a Trinity University study of portfolio survival, for instance, a 100 percent stock portfolio has a 70 percent chance of surviving 15 years, and a 53 percent chance of surviving 20 years at that withdrawal rate. The life expectancy range for most 67-year-olds is 15 to 20 years.

Bottom line: If you use your savings to defer taking Social Security, you can increase your lifetime income more than you would by investing the same money or by buying a fixed lifetime annuity. Better still, deferral sidesteps all worries about making investment choices.

''This is the best deal going, bar none," professor Laurence J. Kotlikoff observed. ''It provides a fantastic risk-free return for waiting." Kotlikoff is chairman of the Boston University economics department and an expert in the life-cycle approach to financial planning.

While the growth rate for benefits is slightly lower from age 62 to full retirement age, as he pointed out, it is still far superior to returns on actual investments. Remember, the long-term real return on common stocks is about 7 percent. Delaying Social Security benefits provides at least that much of a return, guaranteed.

There are caveats, of course. The first is that you might die while you are deferring your Social Security benefits, so you might never collect any. You face the same risk, however, for any money you don't spend. One of the most basic rules of life and death hasn't changed: You can't take it with you.

The second is that Social Security might mail you a bad check. In fact, there is no immediate danger. More important, imagine what your other investments will be doing when, and if, Social Security defaults.

Then why do so many people take benefits so early? Why don't more seniors delay taking benefits? There is a one-word answer for this. Necessity.

Scott Burns is a columnist for the Dallas Morning News. Questions about personal finance and investments can be sent by e-mail to scott@scottburns.com; by fax to 214-977-8776; or by mail to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265.