By TARA SIEGEL BERNARD
If an insurance salesman offered a product with a guaranteed income of
nearly 7 percent for life, it would be foolish not to question whether
it was too good to be true.
But the fact is, such a product exists. And it’s “on sale” right now,
for many people 62 and older, at the Social Security Administration.
Some people nearing or on the cusp of retirement consider buying immediate annuities from insurance companies: they hand over a big pile of cash to an insurance company in exchange for a guaranteed monthly income payment for life. But you can also “buy” an annuity, so to speak, from Social Security, and it’s a far better deal.
Think about it this way. If you delay collecting your benefits,
which can be claimed anywhere from age 62 to 70, the money you leave on
the table each year is basically a payment for a much higher stream of
lifetime income. And that money will buy significantly more income,
perhaps 50 percent more for a couple, than buying an annuity through a
commercial insurer.
“It’s almost a no-brainer,” said Steven A. Sass, program director of the Financial Security Project at the Center for Retirement Research at Boston College, who analyzed
the numbers. “Depending on how long you delay, you will get an income
equal to about 6 percent or more of the savings used to produce that
income. You will get that income, rising with inflation, with no risk,
sent to you by the U.S. government.”
Delaying benefits requires leaving sizable sums of money on the table,
which, for many sixty-somethings, could be too difficult —
psychologically or financially. Some want to start collecting what
they’re owed, while others simply need the money to live on. And
individuals who aren’t healthy should clearly start collecting benefits
as soon as they’re eligible.
But for people who are yearning for more sources of guaranteed income, this strategy — buying more income from Social Security
— is especially attractive now when interest rates are low. Commercial
insurers cannot compete on price, experts said, and they also have
overhead that the federal agency does not. “Annuities look particularly
horrible right now because the insurers must invest in bonds,” Mr. Sass
added, “and bond interest rates are brutally low.”
Consider a couple with a 65-year-old husband and a 62-year-old wife who
decide to buy an immediate annuity — one where payments would keep pace
with inflation, and that would continue to pay out as long as either
spouse was alive. If they paid $100,000 to an insurer, they would
receive in exchange guaranteed lifetime income of about $3,840 per year,
according to a quote from Vanguard. That translates into a guaranteed
income stream of 3.8 percent a year on the money they used to buy the
annuity.
Next, consider what sort of income stream they could “buy” from Social
Security by waiting to collect benefits. Assume the husband, who is
eligible to collect $12,000 at age 65, delays claiming until he is 66.
By waiting the extra year, he would get a benefit increase of $860, for a
total of $12,860.
But if he had to buy that extra $860 annual income, he would have to pay
about $22,500 to an insurer. A much cheaper way of getting the extra
income would be to wait an extra year for his benefits, and dip into his
savings for the $12,860 he is not collecting from Social Security. (Or
he could potentially work an extra year and not dip into his savings.)
By doing this, he receives a guaranteed income of 6.7 percent when he
“buys” the income from Social Security, according to Mr. Sass’s
calculations, compared to an income of 3.8 percent he would receive from
an insurer.
“You will not get anything close to that anywhere else,” Mr. Sass added.
Now let’s imagine the retiree could afford to wait until he was 70 to
collect benefits. By waiting those five extra years, his annual benefit
would increase to $17,000 — $5,000 more than the $12,000 he could get at
65.
But if he had gone to an insurer to purchase that extra $5,000 in annual
income, it would cost more than $130,000, according to Mr. Sass’s
calculations. The less expensive route would be to delay benefits, leave
the $60,000 on the table, and also eat into his savings. That means he
would be getting a 5.9 percent income if he “bought” the income from
Social Security versus the 3.8 percent he would receive from an insurer.
These income rates also compare rather favorably to the income you can
generate by a diversified portfolio of stocks and bonds. “Given the
volatility of such a portfolio, there is a lot of debate and ongoing
research about how much you can safely withdraw without outliving your
savings,” Mr. Sass said. Some research has found that the conventional
wisdom — taking out 4 percent annually — could be too high. But for
argument’s sake, let’s say it’s somewhere between 3 and 4 percent of the
portfolio, and rises each year with inflation. That means you could
initially pull out somewhere between $3,000 and $4,000 for every $100,00
invested.
Delaying Social Security is a bit more attractive for married couples
because you’re also getting something free that you would have to pay
for in the commercial market: the survivor’s benefit. If the
higher-earning spouse dies first, the survivor will continue to receive
that benefit for the rest of his or her life. How much does it cost if
you had to buy it? If we revisit the couple with a 65-year-old husband
and 62-year-old wife, a survivor benefit for the wife reduces benefits
by nearly a third, according to annuity pricing quotes from Vanguard.
(You’ll also pay extra for an immediate annuity whose payments rise with
inflation.)
“If you have a traditional couple where one worked a great deal and
another didn’t work, by delaying claiming you can improve the survivor
benefit substantially,” said Olivia S. Mitchell,
an economics and public policy professor at the Wharton School of the
University of Pennsylvania. “If you care about your wife or husband,
that might also help them in old age.”
The benefits rise so that you will receive the same amount over your
lifetime, regardless of when you begin collecting, if you live to
average life expectancy. But if you are reasonably healthy, the payoff
can be substantial. If the higher earner — or any worker — can hold off
until they turn 70, the benefits collected will be at least 76 percent
more than if payments started at 62.
Take those who are set to receive $1,000 a month at their full retirement
age, which is 66 for people born 1943 to 1954, though it rises to 67
for younger people. A retiree who signs up for benefits at age 62 will
collect only $750 a month. The extra credit earned by waiting until age
70 would increase that payment to $1,320 a month.
Your benefits generally rise by 8 percent each year you wait to collect beyond your full retirement age.
“There is this enormous payoff to waiting,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “And nobody knows that.”
Well, some people do. Of the 1.4 million men and nearly 1.3 million
women who began collecting benefits in 2012, about 1 percent of the men
and nearly 2 percent of women were at least 70.Source: http://www.nytimes.com/2013/11/16/your-money/the-payoff-in-waiting-to-collect-social-security.html?ref=your-money-email&nl=your-money&emc=edit_my_20131118&_r=0
