When deciding on the optimal age to claim Social Security benefits, conventional wisdom – backed by much of the academic research – often favors delaying benefits until age 70. This conclusion is rooted in models that rely on expected value: the assumption that the ‘best’ decision is the one that maximizes lifetime benefits in dollar terms. To create these models, researchers often use a very low (or even 0%) real discount rate, under the logic that the ‘guaranteed’ nature of Social Security payments makes them fundamentally different from riskier assets like stocks and bonds. The analysis, therefore, treats future Social Security benefits as nearly (or exactly) equivalent to those received today, which usually favors delaying because doing so results in a higher monthly benefit – and for those who live long enough to reach the breakeven point – a higher total benefit as well.
However, the assumptions used in traditional Social Security research have significant flaws. By focusing exclusively on expected value, they ignore the important concept of expected utility – that is, the value individuals place on outcomes based on satisfaction (or dissatisfaction) those outcomes provide. Although it’s easier to assume that every dollar is worth the same regardless of when and under what circumstances it’s received, the reality is that preferences vary greatly between individuals. In other words, the practice of using a 0% discount rate – on the basis that Social Security is a ‘risk-free’ income stream – fails to reflect both the opportunity cost of delaying benefits and the full array of risks associated with that decision.
A more practical framework begins with the expected real return of the portfolio used to bridge the delay – typically around 4%–5% for a balanced 60/40 allocation. Unless a retiree has specifically earmarked more conservative assets, such as a bond or a TIPS ladder, it’s realistic to assume that delayed benefits will be funded by withdrawals from the overall portfolio – meaning that the ‘cost’ of delayed filing is the growth foregone on the assets withdrawn to replace Social Security income.
From there, the portfolio’s real return can be adjusted to account for a wide range of risks unique to the retiree. These include mortality risk (dying before breakeven), sequence of returns risk (amplified by higher early withdrawals when delaying), policy risk (future benefit cuts or tax changes), regret risk (emotional reactions if the ‘wrong’ decision is revealed in hindsight), and health span risk (spending when retirees can enjoy it most). Behavioral considerations also matter: many retirees spend Social Security income more readily than portfolio withdrawals, which means delaying can increase the risk of underspending – particularly in the early years of retirement.
The resulting ‘discount rate’ for filing age analysis is therefore highly unique to an individual or couple. Retirees with modest portfolios, health concerns, or a propensity to underspend may see effective discount rates of 6%–8% or more, which shifts the decision strongly towards early filing. Conversely, retirees with substantial resources who are less vulnerable to policy or sequence of returns risks may still benefit from delaying until age 70.
The key point is that the default 0% discount rate used in most Social Security research is not just a benign simplification. It biases conclusions toward delayed filing. In reality, each retiree’s situation involves a complex mix of behavioral, financial, and institutional risks that require a personalized assessment. By acknowledging these factors and adjusting discount rates accordingly, advisors can offer more balanced, client-specific guidance – often revealing that early claiming may be a rational and preferable choice, not a mistake as traditional expected value-based analyses may indicate!
