June 19, 2011 — Imagine for a moment that you just purchased an annuity at age 62 and a half. If you decide to start taking payments on it today, you can. But if are willing to wait 7 and 1/2 years, you could increase your monthly payments by at least 75%, maybe more. Which option would you take?
From our headline you have probably guessed we are talking about social security, which at its most basic is an annuity – a guaranteed payment for as long as you and/or your spouse lives. It is clearly one of the best annuities available. You and your employer paid for it. And the money is virtually guaranteed (unless you believe the world will end soon).
Our opening question was the thesis of a recent “Sunday Money” column by Richard H. Thaler in the New York Times, “Getting the Most out of Social Security“. Thaler makes the case that far too many retirees grab their social security benefit at the earliest opportunity (usually 62 or slightly later), and thus pass up a really good benefit down the road. Indeed, he reports, 46% of current retirees start taking their benefits at 62, their first eligible year. Less than 5% wait past age 66 (called somewhat cryptically the Full (normal) retirement age, leaving a tiny fraction who wait until their maximum retirement age at age 70.
Because your social security benefit goes up every year until you start claiming it (until age 70), many experts including Thaler believe that waiting is better. Hence the at least 75% more claim; that’s how much extra you will get for waiting from 62 to 70. It is “at least 75%” because if you continue working and paying into the system, your benefit could possibly go up even more. Sure you will have foregone the income on the lower benefit for 8 years. However, if you live past 78, you will be ahead (for the record: if you make it to age 65 your life expectancy is 82 for a male and 85 for a woman).
Concerns for widows
Boston College’s Financial Security Project raised a related social security concern for widows in its “Squared Away” Blog. The Project makes the point that many surviving spouses do not understand how to get the maximum benefit they are eligible for, and often make a poor choice. According to Stephen Richardson, spokesman for the Social Security Administration, “There are eight or nine options for retirees, spouses, and widows”. In one scenario a husband and wife are both 62 and eligible for social security. The husband dies that year, and before he starts collecting his benefit. Now the wife has several complex options, including: she can take his survivor benefit, take her own benefit, or delay. She could take one of their benefits and then switch at the maximum retirement age. The right answer depends on their situation, particularly, which mate will get the largest benefit at maximum retirement age (which could change if the surviving spouse continues to work).
And back to the annuities vs. stocks question
Also in the Sunday Money column, Thaler talks about annuities. He subscribes to the theory we reported on last week in our “Stuff for Baby Boomers” article, notably that baby boomers are too much invested in stocks and not enough in annuities. In his opinion, more annuities in boomer portfolios would greatly reduce risk, provide stability, and simplify life. Having made the point in previous columns, Thaler reported on several reasons given to him by baby boomers on why they do not invest more in annuities. Those mostly have to do with understanding and trusting the product/provider (they are complicated products and it is hard to know if they are a good deal), inflation protection (most are not), and stability (will the annuity provider be around in 20 years.
For further reference
When Should You Start Taking Your Social Security Benefits? (Topretirements article)
From the Social Security Administration: When to Start Taking Your Benefits
Comments. What are your strategies for claiming your social security benefits? If you already made your choice, are you happy with it? Let us know in the Comments section below. However please note, all political comments will be removed. Please forward those to your congress person.