You don't make an 8% return if you wait a year or a 32% return if you wait four years. You do make 8% more the year you do start taking it beyond standard retirement age and every year after that until age 70, but that is not an additional 8% return. Here's why: you are forgoing one to four years of payments entirely when you postpone one to four years
If you retire on time say at 66, and you're entitled to $25,000 per year, when you are 80 you would get $25,000 x 14 years = $350,000. If you wait one year you will get 8% more or $27,000 per year. When you are 80, however, you will only get 13 years (because you gave up the first year entirely) at $27,000 = $351,000. So it takes 14 years just to get back to essentially even by postponing one year or to age 80 before there is any benefit or added return.
Again, if you retire on time say at 66, and you're entitled to $25,000 per year, when you are 80 again you would get $25,000 x 14 years = $350,000. If you wait four years until you are 70 you will get 8% more per year or $33,000 per year. When you are 80, however, you will only get 10 years of payments (because you gave up the first four years entirely) at $33,000 = $330,000. So it will take more than 14 years just to get even. In the 4 year postponement scenario it works out to almost 17 years just to break even or to age 83 before there is any added benefit or added return beyond just break even.
I'm not saying don't postpone, but by no means are you getting an 8% return per year by waiting. Giving up $100,000 in the first four years to get $8,000 per year more after year fours may not be a good deal. In fact, it would be no benefit for those that die around age 83, a negative total return for those that die before age 83, and a positive return only for those that die after age 83.
These simple break even analyses do not consider that present dollars are more valuable than future dollars and conversely that future dollars are worth less than present dollars, which would make postponing even less attractive. Also this does not consider any inflation adjustments you will get on your payments in any scenarios. Also this does not consider spousal benefits, which complicate things even further.
So your life expectancy and your spouses eligibility and life expectancy (assuming you have a spouse) must be factored in and that could make it more complicated than the two simple scenarios above.
ST
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Posted by: straub@shore.net
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