Dear Larry,

I just read your just released, co-authored book, Get What's Yours -- the Revised Secrets to Maxing Out Your Social Security - thanks.

My question is about the trade-off between taking retirement benefit early (and investing the money, because I don't need it to live on) and waiting until FRA or even 70. In the book, you dismiss the possibility of successfully investing the benefit with a few statistics about how bad the average investor is. Fair enough! But there are many good investments, such as REITs or LendingClub, that seem over time to offer a solid 4-8% return with little risk. Aren't you being a bit quick to discount the possibility of solid investment returns, which in turn would undermine your arguments for delaying retirement benefit until age 70?

Thanks, Bruce

Dear Bruce,

Social Security is an insurance product, in this case a longevity insurance product, so evaluating it as an investment ignores the value of the insurance, which is huge. But even thinking about Social Security just as an investment would lead a good investor to wait till 70 to take her retirement benefit (assuming waiting till 70 was part of her optimal Social Security strategy, i.e., was recommended by our software). The reason is that Social Security's actuarial benefit increase -- the reward for waiting to collect -- was developed based not just on what are now highly outdated actuarial tables (making patience even more rewarding), but also based on a highly outdated assumed 3 percent real return. The real return provided by 30-year TIPS (Treasury Inflation Protected Securities) right now is less than 1 percent. So, on a risk-adjusted basis, you are, in effect, earning 200 basis points more by being patient than you can earn on the market. Consequently, when patience is the optimal strategy, its partly due to the fact that it's providing a significant arbitrage opportunity.

To be clear, our software realizes that for those who care about potential heirs, Social Security is not the same as a stream of coupon payments on a long-term TIP. Consequently, unless you change the inputs, it discounts future benefits at a 2 percent real rate, not the prevailing roughly 1 percent real return on long-term TIPs. Discounting means to make less of. So using a 2 percent, not a 1 percent real return makes less of future benefit. On the other hand, the fact that these benefits will potentially continue through your maximum age of life means you need to value benefits through your maximum age of life. This is also part of our program's valuation method. It does simple discounting at a 2 percent real rate (unless users enter other nominal interest rate or inflation rate assumptions that make the real rate -- the difference between these two rates -- different from 2 percent), but it discounts all benefits right to each household member's maximum age of life.

best, Larry