Social security: the best cheap 'annuity' option
Advising clients on when to start collecting Social Security benefits and how to maximize those benefits has become an important part of any financial advisor's work. But are they doing a good enough job?
According to the Social Security Administration, the percentage of Americans who are delaying filing for benefits -- meaning they are receiving bigger monthly checks for the rest of their lives -- has risen somewhat over the past decade. But a surprising 45% of men and 50% of women are still pulling the trigger at the earliest possible time: when they reach 62. And even though by waiting until 70, they could be receiving substantially more in their monthly check, only 1% of men and 2% of women are waiting that long.
While most people file at 62 because they simply cannot keep working, some are also getting that advice from advisors. Some advisors argue that invested assets obtained from early benefit checks will earn more than any added benefits to be had by delaying filing, while others claim that a client who waits to file may not live long enough to earn back foregone benefit checks. Yet by waiting at least until age 66 (the current "full retirement age"), a higher earning client can enable a spouse to claim spousal benefits worth 50% of the partner's benefit, and by waiting until age 70, can ensure a lower earning spouse of a much higher survivor benefit, should the client die first.
Meanwhile, some advisors even warn -- and some clients fear -- that Social Security "may not be around" past 2033, though few political experts expect that even if Social Security were somehow cut, it would impact those in or nearing retirement.
'CHEAP ANNUITY' OPTION
But Alicia Munnell, director of Boston College's Center for Retirement Research, says such advice is misguided. She counters, "Social Security is a cheap way to buy an inflation-adjusted annuity, and one where the benefit payment gets 76% larger by waiting until 70 to start receiving it."
Munnell argues that even those who have retired or been laid off and need money to live on should, if they have even a modest retirement fund, tap that rather than drawing their Social Security early. "I'm not saying that people should spend all their savings and leave no income buffer. That makes no sense. But if they have a reasonable amount saved for retirement, they're better off spending some of that to live on and waiting to start collecting their Social Security," she says. She explains, "What you really need in old age is guaranteed income and Social Security is the cheapest way to get that."
Michael Kitces, research director at Pinnacle Advisory Group and a Financial Planning contributor, agrees and has written about the perks of waiting to claim. He agues that, at least for those in reasonably good health in their 60s (or who have a lower-earning or non-working spouse), waiting until 70 to collect one's Social Security is "a highly beneficial investment, with a real return that dominates TIPS, is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk." He calls waiting until 70 to collect "the best long-term return money can buy."
Dave Lindorff spent five years as a China correspondent for Businessweek, and has written for The Nation and Salon.com.
This story is part of a 30-day series on Social Security and retirement income strategies.