Chris Farrell: It's difficult for some, but holding off on Social Security pays off big

Among the list of critical questions near-retirees confront is when to file for Social Security. Most people claim Social Security before their full retirement age despite the financial rewards of waiting.

A growing body of scholarly and finance literature makes the strong case that people with retirement savings should tap those accounts first and delay taking Social Security. (I'm assuming for this column that continuing to work isn't practical or a desirable option.)

The idea for this column came from recently reading "Money Magic: An Economist's Secrets to More Money, Less Risk, and a Better Life" by Boston University economist Laurence Kotlikoff.

I recommend "Money Magic." Kotlikoff offers strong arguments for his framing of personal finance strategies through an economic lens. A number of his ideas are unfamiliar and thought provoking.

In chapter 4 he writes: "If this chapter teaches nothing but the general value of taking retirement-account withdrawals before taking Social Security, I will be a happy author."

The argument for delay is persuasive. The Social Security benefit is potentially 76% higher if you wait to file at age 70 (the latest) compared to age 62 (the earliest). Every year you delay past your full retirement age, you gain an approximately 8% boost. The full retirement age for most people is currently 66 years plus a few months.

Market volatility doesn't matter; you can't outlive your Social Security benefit; and it comes with automatic cost of living adjustments. Social Security is a valuable asset.

"You want more of an asset in inflation-protected form in retirement, especially with inflation such a concern," says Kotlikoff in an interview.

A 2018 research paper by four economists suggests that many people with retirement savings can safely embrace the strategy of drawing on savings first and filing later. In "The financial feasibility of delaying Social Security: evidence from administrative tax data" the scholars found that some one-third of beneficiaries who claim before their full retirement age had enough IRA assets to finance at least two years of Social Security benefits, while one-quarter had enough IRA assets to finance at least four years of Social Security benefits.

To be clear, it's vital that people have the option of filing earlier than age 70. The best choice for people in poor health, caregiving responsibilities, and long-term unemployment is often to file early.

But waiting to file for benefits is a savvy financial move if you have the resources to delay taking Social Security.

Chris Farrell is senior economics contributor to American Public Media's "Marketplace" and a commentator for Minnesota Public Radio.