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Conventional wisdom and many financial
planners say that you should start taking Social Security benefits
as soon as you are eligible. For many, that is at age 62. This is
another time that conventional wisdom may be wrong. Read on to see
whether you should delay receiving those benefits.
A bird in the hand is better than two in the bush, right? There’s no
guarantee that you will be able to catch the birds in the bush and
you know that you already have a bird in hand. If that bird
represents your next meal then you’d be a fool to let it go in hopes
of catching several birds in the bush.
On the other hand, if you have enough birds in the freezer to feed
you for several months it might be worth taking the chance on the
multiple birds in the bush. Better yet, is there a way you could
have both?
If the bird in question is your social security benefits, you may do
better waiting for the birds in the bush. This is especially true if
you have enough money in savings to meet your needs for the next
several years. Even if it means spending down your principal to
postpone the date you start benefits, you may be far ahead in the
long run. You’d get the bird in hand and the ones in the bush!
On the other hand, if you aren’t able to meet your needs based on
what you’ve set aside, than the bird-in-the-hand (taking benefits at
age 62) is the better choice. Regardless of when you start Social
Security payments, make sure you don’t delay receiving Medicare.
Conventional wisdom says that you should take benefits at age 62
because you can invest that money and earn a better return then
Social Security does. We’ve all heard how the average return on the
Social Security Trust Fund is only 1%, right? Wrong.
You can earn a guaranteed 8.25% per year by delaying when you start
receiving benefits from age 62 to age 66. And it doesn’t depend on
what the stock market does. It doesn’t matter what happens to
interest rates.
Taking benefits at age 62 results in receiving only 75% of the
amount you would get if you wait until you turn 66. Every year you
wait, the amount you receive increases. By waiting until age 66, the
annual increase averages 8.25% per year.
The average annual return you are guaranteed by waiting until age 70
is 10% per year. Benefits increase 8% every year past age 66.
Waiting from age 62 to age 70 results in monthly payments that are
81% higher.
If you or your spouse lives beyond age 79 then you will be better
off delaying benefits. Average life expectancies indicate that
roughly 50% of those age 62 today will live beyond age 80. Medical
advances will only increase that over time.
The risk of delaying benefits is that the main breadwinner may die
prior to your breakeven age. That would still result in higher
monthly payments to the surviving spouse who may live much longer.
You can also use low-cost term life insurance to make up for the
lost benefits.
Many of those retiring today have not set aside enough to provide
for themselves and their spouse for the rest of their lives. Some
face the prospect of draining their retirement savings and living
just off of Social Security if they live beyond their 80’s. Even if
you will use up your savings more quickly in the short-term,
delaying the start date until age 70 could significantly improve
your Social Security lifestyle.
There’s no way to tell with certainty what the best decision is for
you because none of us know our life expectancy. If you think, based
on your family history and present health that you will live beyond
age 79 and you have enough assets to provide the money you need
until age 65 or 70, then you may want to wait.
Some insurance companies recommend buying an immediate annuity to
provide a payment equivalent to what Social Security would otherwise
provide, but I don’t recommend that approach and will explain why in
the next article.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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