Source: Wikimedia Commons.

Social Security benefits are one of the most important sources of income for retired Americans, and deciding when to start taking monthly checks from Social Security is a key element of your financial planning in retirement. There's a lot of controversy surrounding the decision on when to claim Social Security benefits, though, with most recipients taking payments before reaching full retirement age, even though policymakers say they're making a mistake by doing so.

One of the arguments some financial advisors make is that by delaying your benefits, you can get what they call a "guaranteed return" of up to 8%. Although it's true that waiting beyond age 62 to take Social Security will give you bigger monthly payments, it's highly misleading to call this a "return" in the traditional sense, as it's not as though those higher payments don't come with a cost. Let's take a closer look at this 8% return myth and why it hasn't stopped many American retirees from claiming their benefits as early as possible.

Why waiting to claim gives you bigger monthly Social Security checks
Social Security benefits are designed to make payments throughout your lifetime. In order to reflect the impact of claiming earlier or later than full retirement age, Social Security provides for reductions or additions to the standard primary insurance amount that determines your monthly benefit. If you retire at age 62, you'll receive 25% less than if you had waited until age 66. Conversely, if you retire at age 70, your monthly check will be 32% more than your full retirement age benefit.

Source: SSA.

As you can see above, the actual changes in monthly payments don't exactly follow a straight line. The concept of the 8% annual return comes from the fact that for every year beyond 66 that you wait to take benefits, your benefit goes up by 8% of your primary insurance amount. Strictly speaking, that equates to an 8% increase in your check only between age 66 and age 67. In subsequent years, the increase -- $80 in the chart above -- represents a smaller percentage that falls to 6.5% from 69 to 70. Similarly, the increases from waiting rather than taking early benefits vary from year to year as well, from as high as 8.2% from 63 to 64 to as little as 6.7% from 62 to 63.

Many financial advisors characterize this percentage as a "guaranteed return" that you earn by waiting. Some even try to compare it to the returns on investing in stocks or other financial assets, trying to pitch waiting as the best money move anyone can make. Yet the problem with thinking of delaying benefits as providing a guaranteed return is that in order to get the higher monthly payment, you have to give up the chance to receive those earlier payments entirely.

The real return on delaying Social Security
A true assessment of the returns of delaying Social Security needs to include not just the higher payments you receive, but also the time value of the benefits you give up. Last year, well-known financial planner Michael Kitces did his own analysis of the return of delaying Social Security.

The returns from delaying Social Security are anything but "guaranteed," as Kitces found out. During the period in which you could have been getting benefits but chose not to, your return from delaying is actually negative. Once you start receiving monthly payments, the higher amount helps you catch up gradually, but it still takes years to get back to even. If you assume a 3% rate of inflation, Kitces calculated that you have to live to age 80 in order to break even on an inflation-adjusted basis.

The biggest returns come to those with the longest lives. Those who live to 90 or more earn a 5% real rate of return, with annual real returns topping 6% in your late 90s.

That might not sound like much, but it compares favorably to alternatives. Long-term Treasury bonds that adjust for inflation pay around 1%. Immediate annuities tend to produce much lower payouts, because insurance companies aren't willing to make the assumptions the government makes, and instead use more conservative life expectancy and return projections in calculating their payouts. Even the stock market has only generated around 7% in average annual inflation-adjusted returns over the long run.

Still, there's clearly risk involved in what too many call a guaranteed return. According to the life expectancy tables Social Security uses, about one in eight men and one in 11 women die between 62 and 70. About a third of 62-year-old men die by age 78, before reaching breakeven, and a third of 62-year-old women die by age 81, eking out just a small real return from delaying. And while those who are married have to consider the value of spousal and survivors benefits in assessing real returns from various claiming decisions, joint life expectancy still plays a key role.

Delaying your Social Security benefits often makes sense, especially if you expect to live a long life and have other savings you can draw from in retirement. Yet it's important to look beyond overhyped myths of guaranteed returns and instead do your own personal analysis of the pros and cons of claiming earlier or later. Only by looking at it from your own financial angle will you make the decision that's truly best for you.