Optimizing social security benefit initiation and postponement decisions: a sequential approach

The paper supposes, consistent with law, that single or married Social Security beneficiaries view an initiation or postponement decision in terms of a sequential decision process rather than in terms of a single evaluation made at or before the normal retirement age. The question asked at each age, according to the sequential approach introduced in this paper, is not whether to initiate now or postpone until some time in the distant future, but whether to initiate now or postpone for just one year. This paper shows that the opportunity rate of return (or minimum investment yield) required to justify initiation at any eligible age (62 through 69), varies from one eligible retirement age to the next within any cohort group, and at any eligible age across cohort groups. Moreover, while members of a particular cohort group might find it advantageous to initiate benefits at a particular age, say at age 62, early retirement might not be advantageous a year later. This oscillation, uncovered by sequential analysis, could not be so easily demonstrated using an aggregative approach. © 2008 Academy of Financial Services. All rights reserved. JEL classification: D55; J11; J26; H55