A recent article of yours got me to thinking again about a question I had asked the social security administration several months ago, and I am still waiting for an answer from them. Perhaps you can answer this question for me. If I delay taking my social security benefit in order to receive a higher amount ( I am now 61 years old), would this delay also affect the amount that my wife would be able to receive if she draws from me. She is presently working and will be able to draw approximately $900. per month at the age of 62 (in three years) based on her own earnings. She says that she intends to draw her social security at 62. Your help with this will be greatly appreciated.

Bill

From Scott Burns:

Yes, your wife would be eligible for your presumably higher benefit as your survivor. Again, to understand the whole set of relationships, I suggest reading the Center for Retirement Research paper.

Alicia Munnell and Mauricio Soto, "Why Do Women Take Social Security Benefits So Early?"

What about women?!!!

I'm 62 and just started taking reduced benefits of $966 per month. However, my husband and I just don't know how to figure out if that was wise. Our Social Security rep told us that it would take 14 years to make up for the benefits if we didn't take it now.

If I wait one year my monthly benefit increases to $1032. Wait two more years and it will be $1118 per month.

We also don't know how my taking early benefits will affect our tax situation.

My husband will start taking his full retirement benefits next year. We are semi-retired.

Many thanks for any information you can provide to help us.

Linda

From Scott Burns:

According to the Boston College Center for Retirement Research study that was mentioned in the column, married women optimize their benefits by taking them early, as you did, at age 62. Their spouses, on the other hand, should defer benefits until age 68 or 69.

This finding is based on the probability that husbands will die before their wives and that you will eventually benefit from his larger deferred benefit. While 14 years seems a long time, the reality is that your personal life expectancy, at 62, is a good deal longer and your joint life expectancy is longer still--- in the vicinity of 25 years.

A friend sent me your article on the advantages of delaying starting social security. I find this idea very interesting. Have you considered borrowing from the cash value of whole-life insurance policies, espcially older policies that charge 5% or 6% on borrowed funds, rather than withdrawing from a tax-deffered account?

Sincerely,

Edward

From Scott Burns:

I didn't consider that option for two reasons. First, the primary issue is the benefits of deferring Social Security, not the method of funding the deferral. Second, relatively few people have whole-life insurance policies with the required amount of cash value.

one question to clarify and a comment or two in passing......what income are you referring to in the paragraph taking about the plunking down of 36,111 for the joint inflation prot. annuity..........query, have you discounted the effect of taxes on taking the 23,940 from a tax deferred item....which in of itself might not be a bad idea if most of your retirement funds are tax deferred and taking a short look at the MRD at 70.5......further you look to reap the benefit when your 85 years old; that has a diminshing return at that stage! Finally who knows what might be in the congressional offerings as d-day what ever day that is and what effect the habits of the baby boomer generation will bring. thanks. Stan, navarre, fl

From Scott Burns:

There are a bunch of contingencies here. Some people could take their SS benefits and discover that 85 percent of the benefits are added to their taxable income. Others might receive the benefit tax free. I believe most of the people who read my column are likely to be in the first circumstance--- discovering that their SS benefits are almost fully taxable.

The taxation of SS benefits argues for taking income from tax deferred accounts now so that they will be smaller later, reducing the income from MRDs.

Anticipating the reduced utility of money at 85 rather than 62 or 65 isn't very useful because we simply don't know. It's pretty easy to imagine circumstances where some additional income at 85 makes the difference between happiness and misery.

If all of us delayed decisions because we were uncertain of future action by Congress we would never, ever make a decision. All we can do is make the best decision we can make based on available information at the time. That information tells us that we're likely to increase our lifetime consumption by delaying Social Security benefits.

The only exception to this is people who know that their lives will be materially shorter than average.

RE; Your article of Oct 1, advising to wait for claiming SS benefits. As a single male 61, I intend to file for my benefits starting at age 62 even though I do not need the income. By putting that money to work, in 4 years time (full retirement of 66) I will have an asset of about $70,000 that will earn just under what full retirement would be. This asset is something I can leave to a beneficiary, whereas my social security would be gone at the time of my death. Do you find fault with this logic ? Dave

From Scott Burns:

The bet a single male makes is quite different from the bet a married male makes. The married male can defer benefits and expect that either he or his spouse will collect the increase in benefits far longer than 14 year break-even period. A single male, on the other hand, is limited to his personal life expectancy. Even in your case, however, the life expectancy for the average American male at 62 is 18.9 years--- well beyond the 14 year break-even period.

If your goal is to maximize your lifetime income, deferring benefits is useful. If your goal is to leave money for another, taking benefits early and allowing assets to grow may work out better, particularly if you don't live to expectancy.

Mr. Burns,

I enjoyed your article on deferring SS payments. A few months back, I wrote the attached spreadsheet to calculate a breakeven point for this situation since I'm now 64 years old and contemplating retirement. My spreadsheet indicates that for the situation discussed in your article, you would need closer to 30 years to break even. Now for a disclaimer: Nobody has checked the assumptions used in the spreadsheet (listed on the opening page).

I'd appreciate any feedback and by the way if you like it, feel free to use it. If you think it needs modifying, I could take care of that also.

If your computer won't accept Excel macros, you'll need to bring up Excel and click on Tools> Macro> Security and set it to Medium. To run the Excel macro, you'll also need to click on Tools> Add-Ins and make sure the following box is checked: Analysis Toolpak-VBA.

Sincerely,

Al, Denton

From Scott Burns:

Sorry, I have enough trouble error checking my own spreadsheets. What I can tell you is that using a sophisticated program like ESPlanner, I have found that deferring Social Security benefits generally increases lifetime income over the alternatives.

I read with interest your recent article entitled "Delaying Social Security could be a good bet", particularly because I am turning age 62 next week and am in the process of deciding whether or not to begin taking my social security benefits. However, one scenario that appeared to be missing from your breakeven or "catch up" calculation is one in which an individual does not need the immediate additional income and invests the social security benefits at some reasonable rate of return when taken early. How does this effect the breakeven calculation? This could influence my decision if this significantly extends the "catch up" time on foregone benefits.

Thanks for your advice.

Larry

From Scott Burns:

You'd need a very high return to do better than deferral. Basically, the increase in benefits provides a higher effective return than you can get in the market, with virtually no risk. In the column, for instance, it would cost me $36,000 to buy a private joint and survivor inflation adjusted annuity to provide the lifetime income increase that I would get from deferring $24,000 in benefits.

I have a question regarding your article Saturday in the Boston Globe:

What if you continue to work after 65 and don't actually need the money from social security-you can pay your expenses from your current earnings. If you take the social security at 65 and invest it, how does that compare to waiting until you are 70 to start taking it out?

Thanks

Leslie

From Scott Burns:

If you don't need the money because you are still working, the benefit of deferral--- for a married couple--- is still greater than what you would get by taking benefits and investment them. There are two reasons for this.

First, there is a good chance you'll need to pay taxes on the early benefits, reducing the amount available for saving. As a consequence, your savings will buy a lower lifetime annuity income than you would be able to get from simple deferral.

I've read your columns for years, and generally find the advice sound and timely. Your most recent article about delaying social security benefits seemed naive, however. First of all, I can't figure out who the target of this advice should be. People with substantial wealth in retirement assets, say five million or more, probably don't care a fig about an extra hundred or so tacked onto their social security checks. It's insignificant. Those with not very much saved, say a hundred thousand or less, probably constitute the majority of retirees. For them to wait a couple of years extra and pull maybe $20K a year out of their meager savings to do so is just a non-starter. I'm sure most of them would rather hang onto their nest egg for emergencies and as kind of a financial security blanket. Let's say, then, that your advice was targeted to those in the middle, i.e., folks with something between a few hundred thousand and a couple of million. For them your calculations are probably fine, except that you make the implicit assumption that everything will stay the same vis-a-vis Social Security benefits for a period of 20 to 25 years. That's the approximate length of time you have to live in order for the deferral to start paying off. I find this politically naive. We all know that a crunch is coming in Social Security, and the cynical side of us says that nothing will be done in Congress until things get so bad that there's no alternative. Some things are easy to predict: retirement age will rise again, and payroll taxes will increase sharply. Neither of those will ease the crunch in the short run, however, so it seems pretty clear to me that benefits will have to be reduced. The most palatable path will be to reduce benefits in relation to other (investment) income and/or total wealth (net worth). We've already seen how "means testing" is creeping into Medicare, and I think that will be a model for reductions in benefits for those with greater retirement savings. To me, then, it seems likely that the greater deferred benefit is likely to be reduced in the future, completely wiping out any advantage of having deferred the initiation of benefits. In other words, " get it while the getting is good" is probably the best course to take with regard to Social Security. My reading is that part of the reason so many are already drawing benefits at age 62 is the intuitive guess that those benefits aren't always going to be there. The only way your calculations make sense is in a static universe, which to me seems highly unlikely.

This retirement thing is a bear to figure, isn't it?

James

From Scott Burns:

I think you've bracketed the likely groups about right. It won't matter for those with lots of assets and it won't be an opportunity for those with little in assets.

You would be surprised, however, at how much one needs in financial assets before Social Security benefits are a trivial concern. A high lifetime earner, for instance, may expect full retirement benefits of about $2,000 a month with additional benefits of $1,000 a month for an equal aged spouse. It would require a portfolio of about $900,000 a year to provide that income. As a consequence, Social Security will be very important for someone with "only" $1 million in financial assets.

The other thing to consider is that changes in future Social Security benefits won't happen in a vacuum. You can be pretty sure that when the crunch on benefits comes, we'll have higher taxes, more inflation, and a degree of uncertainty that will be very unkind to stock and bond prices. Indeed, the safest cash flow is likely to be from Social Security benefits that are already committed because it would be politically difficult to reduce them.

I think we all need to have a sense of proportion about the unfunded liabilities coming our way. The elephant in the room is Medicare and Medicaid, not Social Security. To put the issue in some perspective, the unfunded liabilities of Medicare Part D--- the prescription drug plan--- are about twice the unfunded liabilities of the entire Social Security program. You can learn more about this by reading my earlier columns on Social Security or by reading "The Coming Generational Storm" (MIT Press 2004) which I coauthored with economist Larry Kotlikoff.

I found your article (Monday, 10/2/06, Houston Chronicle) very interesting. I will be 67 on October 5th, I delayed my drawing of SS because I am still working and for the two years of delay will in crease my amount approximately seven percent a year. I will be in the base of approximately the amount you mentioned in the article of $1995. Other factors an individual will have is the annual cost of living increase that varies, and if you are still working and paying in SS your cost of living increase percentage will be more and even this has various factors involved. I'm not including this in my below two questions.

I realize you can not cover every situation in an article without writing a book. But, I do have a couple of questions that are confusing me. Maybe you can answer or my head was too thick when the SS office tried to explained it to me. The questions involve the base amount.

Question number one - did I understand this correctly? As I understand the years of delay percentage is calculated against your base to determine the amount you draw. My wife has only worked a few years during our marriage. She started drawing at age 65 and by not waiting the four months (both our birth year, 1939) she is cut by three percent. (She was never told this when she signed up to start drawing.) However, once I start drawing her amount will increase to half of my base (approx. $950) minus her three percent, not the amount I draw with the annual delay of approximately 14 percent included?

Question number two - both paragraphs. After my death my wife will draw my amount minus the three percent but this is the base amount only, it does not include the increase percentage for the number of years I delayed before drawing? The only way the base increases is if my income is high enough to put me in another pay group and cost of living.

I am considering delaying my drawing for another year or two as long as I continue working and maintaining or current living style. I realize the amount missed out on and the number of years it will take to make up this amount. I want to draw as much as I can once I fully retire and one of biggest reasons is for my wife to have the maximum she can get if something happens to me. But, if what she draws is figured on strictly my base then the delayed years will not help her once I am gone - true or false?

If you do not have time to answer this I understand. I imagine you will get a lot of mail/emails on this article. It seems not many of the individuals working at he SS office understand all the situations and not trained for this. The main thing they push is to start drawing as soon as possible including early drawing. I imagine they have been trained to do this to keep the individual amounts down as much as possible.

It seems you have been doing the same thing as I in trying to determine the maximum amount.

Thanks for your time. I think the article should bring create questions and thoughts for a lot of people.

Lewis

From Scott Burns:

The benefits your wife will receive after your death, if you die before she does, will be equal to the benefit she was receiving plus the difference between that an your benefit. As a practical matter, she will receive the higher of the two benefits.   According to the Center for Retirement Research study cited in the column, high earning males can optimize lifetime benefits by deferring to age 69.

I had the same experience you had in my visit to the Social Security office. The agent was quite eager to have me sign up for benefits and, at one point, actually stated that it was more convenient to have me sign up for benefits so the Medicare part B payment could be automatically deducted.

In fairness to the Social Security representatives, we need to understand that most people take benefits early because they need to and that Social Security benefits are the largest single source of income for most retirees. All these questions about deferring benefits are what some would call a "Cadillac problem"---- it's good to have a problem with your Cadillac because it means you've got a Cadillac.

Here is the URL for the study: Alicia Munnell and Mauricio Soto, "Why Do Women Take Social Security Benefits So Early?"

Mr. Burns: As a 60 year-old "baby-boomer," I have been studying the pros and cons of taking my Social Security at 62 or waiting to the "full benefit" age for me. I see the logic of your argument in your October 1 article, but doesn't it stand or fall on the premise that the recipient needs the income? If one plans on investing early Social Security benefits in a conservative income fund for the 4 to five years up to the full benefit age, the cost of replacing the "lost income" of a delay is irrelevant. By my calculations, if I invest my age 62 - 66 benefits at 5% a year, it would take the full benefit (age 66+) amount 12+ years to "catch up," or until I'm 78 years old. In the meantime, I have the availability of a large liquid resource I wouldn't otherwise have. Plus, at age 78, the large sum of early benefits will generate a large monthly income that will offset, to some extent, the disparity between the "early" and "full" benefits I'd be receiving at age 78 and beyond. Finally, of course, who at age 60 can bet he or she will live to see age 78? Thanks for stimulating my re-consideration of these issues.

--Jim

From Scott Burns:

You're right that the analysis I did is oriented toward maximizing lifetime income. But it also works for the investment case as well. If delaying SS benefits for a year "costs" $24,000 in lost benefits but it would cost $36,000 to provide the same lifetime income benefit with a comparable inflation adjusted annuity, you can substitute SS benefits for money that might otherwise have to be drawn from investments.

I just read your article in the Oct 3 edition of the Daily Herald regarding the delaying of receiiving social security benefits. It seems half the articles I see say to take the money and run and the other half as you suggest to delay for the increased benefit. One question I do have is if you delay 3-4 years as you suggest, does that mean you have to continue to work for that period of time or are you going to lose any benefit because your earnings were zero for that period. I planned on retiring at age 61 and waiting for 1 year to apply for social security using my pension and deferred compensation for income during that time.

Greg Wood Dale, IL

From Scott Burns:

Your benefit is based on your 35 years of greatest earnings, as adjusted by the Social Security formula. As a consequence, you'll get the increase in benefits based on whatever your earnings record is when you take the benefits. Odds are there will be a slight improvement, depending on your previous work record.

Hi Scott:

Thank you for your retirement information that you provide almost on a daily basis. Our Social Security benefits are almost identical, and I have a wife entitled to a Govt. Pension from the State of Illinois.

I also did a comparison of taking the Social Security benefits at the various ages, and it looks like the break even is 78 years old. In other words, I would need to be approximately 78 years old before it was worth waiting to start taking my Social Security benefits. I based this information off my latest Social Security Statement. Please note, I did not build into my example inflation or the cost of money into my spreadsheet. Obviously our dollars are worth more today, than tomorrow!

I agree that it makes sense waiting to take our benefits, as long as life provided some type of guarantee living to age 80. You state that waiting to take Social Security will deliver a high return, with no risk. I do not agree!

As long as the husband and wife are alive, both are able to receive Social Security benefits. If one spouse dies, the Social Security program only will pay the highest of the two benefits. The advantage of receiving both payouts is eliminated! We had a relative that waited for the higher payout, and died of cancer at age 70. Unfortunately the Social Security System does not continue to provide the same benefits payable to the surviving spouse.

My wife qualifies for a Govt. Pension from the State of Illinois. Based on the current Government Offset Provision, my Social Security Benefits for my wife would be reduced by approximately 90% when I die.

I appreciate your information since so many of us approaching retirement and there is no easy answer to this decision.

I was surprised. Your column generated some thoughtful discussion. See this link-

Morningstar thread Cheers David

From Scott Burns:

Someday the behavioral economists are going to have a ball with this question and our responses. If the breakeven is at age 79 or so, why is it that so many people appear to want to assume that they will be dead? If you check the U.S. life table available as a PDF download from the National Center for Health Statistics, you'll find that the average American has a life expectancy of 18.9 years at age 65.

That means they have a 50 percent chance of living to age 83.9 years. The same table indicates they have a 25 percent chance of living another 6 years to age 90. There is risk, of course, but the rational way to make the choice is to view it as a life annuity decision.

The offset provision is a regular source of reader mail and it makes this kind of decision very complicated (and often less attractive) because it can reduce the long term benefit by a significant amount.

I am 62 and in the process of determining when I can retire again (72T in 1998/you know the rest). My mailing from the SS advises I will increase my SS benefits by $666 if I retire at 70 versus 66. To make an informed decision as to what age to retire, I visited the SS office and was advised the amount at ages 67, 68 and 69 are the same as the amount at age 66. In other words, there is no difference in the amount I would receive at 66 until I am 70. This does not seem to agree with your article in Sunday's paper. I realize by continuing to work the number would change but I also have the risk of making less and reducing the amount i would receive. Did I receive correct information?

From Scott Burns:

Sadly, I think you were misinformed at your Social Security office. If you check the Social Security website, www.ssa.gov, you'll find a good deal of information on how much your benefits will increase if you defer them. The site also offers a number of calculators that will tell you how much your benefit will increase.

I enjoyed your article on "Delaying Social Security," but felt I needed to comment on one item you did not consider in your article: investing the money one receives from Social Security (when taking SS at normal retirement so no penalties are paid.) If one can delay taking Social Security, they can surely take it and invest 100% of what they receive. If you are married, in the 25% tax bracket and scheduled to receive $1995 per month; you only need to make 7.686% (monthly compounding) on your money and will have saved $102,237.10 in 54 months, and it will return $628.02 per month. This is the same amount that you indicated that Social Security would pay extra by delaying 54 months. (This assumes you receive $1571.06 per month after paying 25% taxes on the 85% of SS that is taxable .) Anything longer than 54 months at the 7.686% would put Social Security at a disadvantage and you would never catch up. In my case, I worked 3 extra years and invested all the money I received from SS, most of it in Vanguard Health Care, which increased significantly during this time. I was at the break-even period within the first year and well ahead today. The problem with Social Security is that their scale is linear, whereas interest and yearly gains are compounded. When I was considering my options, I thought that the risks of the market not returning around 9% per year was equal to the risks of my wife and myself not living 14 plus years (note that a 5% gain on your saving would result in $94,875.70 after 54 months and would require that you live approximately 32.6 years (after age 70) for SS to catch-up at a difference between $628.02 and a monthly interest from your investments of $385.59 for a net difference of $242.43 per month.)

Ron

From Scott Burns:

The increase in Social Security benefits for deferral does not include additional adjustment for inflation, which you would also receive. The current risk-free return on TIPS is about 2.3 percent which is quite a bit lower than the 7.686 percent return figure you cite. I think you are underestimating market risk or the difficulty most people would have in achieving a 7.686 percent return over a 54 month period.

So, how much will that extra income mean if you are dead? Remember as we get older there are only a limited number of QUALITY years given to each of us.

Unless your job offers you the enjoyment and freedom of being retired.....I'd say take it as early as possible. Remember, that when you are dead, you are dead a long time. Since we're in the same age group, I read your column with interest. You make a valid point, but I think your assumptions for a comparison are erroneous. You priced an annuity priced for you and your wife to receive the income for the rest of your lives. Social security doesn't work that way. It only provides income durint your lifetime. Therefore, I tink you bought a better product than the one you gave up and it cost more. I did a little checking on the Vanguard site and it looks like it would be somewhere in the upper $20K area. It still may be attractive, but not quite as good.

Keep up the good work.

Regards,

Gary

From Scott Burns:

You need to check the literature on Social Security survivor benefits. For a married couple, the survivor gets what amounts to the higher or the two benefits. Generally speaking, that means a surviving wife will receive the higher benefit of her husband and their joint expectancy is in the area of 25 years.

Death is always a tough contingency. And some people will be on the wrong side of the actuarial tables. All we can do is play the odds.

In regards to your article in the Dallas Morning News, "Deferring Social Security", I understand your theory, but I think that you have not addressed something. This is the second time that I have read your thoughts on "Deferring", and I still feel the same. You suggest that it is better to withdraw your taxable savings and allow your SS to keep increasing. This would be great, however, if both of the spouses were receiving benefits and one were to die, the remaining spouse would only receive one of the SS benefits, whichever was the highest. If one was to collect their SS benefits and leave their Savings intact, the Savings would still be there for the survivor.

Please address this, or if I am incorrect, please advise. Thank you.

Darlene

From Scott Burns:

It is true that one benefit goes way with the death of a spouse. But it is the lower benefit and your cost of living will go down as well, offsetting some of the benefit loss. Since the higher benefits from deferred Social Security cost less than it would cost to buy the same income from private assets, you are still better off with a higher Social Security benefit and lower asset income.

Scott: When the government took off the income cap on what your income was in order to collect social security I was 67 and notified the Social Security office I wanted to start taking my social security benefits. This was five years ago and I have reinvested the money I get from Social Security (presently $1879/month) in common stock. The stocks I have invested it in are bank stock (Wells Fargo, Buse Bank Corp and Bank America), energy stocks CVX-DVN-XOM-COP-APA.

I have also put some of the Social Security money into closed bond funds which pay around a 7-1/2% dividend and is reinvested into more shares (AWF, BNA,RCS,KMM,TEI). All of these funds are listed in the NYSE.

All of these securities pay a nice dividend which is subject to 15% income tax and is reinvested in more stocks in these companies.

I am not sure how the math works out but it would seem to me that I am ahead of the game taking the money when I did rather than waiting until I was 70 years old. You have a point in your article if I would have taken the monthly social security money and spent it at casinos and bars.

Suggest you write an article on the pros and cons of investing in closed bond funds which is an investment a lot of people are not aware of. Some of these funds pay a monthly dividend while the others pay a quarterly dividend and all dividends are reinvested. ..I enjoy reading your investment articles.

Curt

Dear Mr. Scott...in response to your column on delaying Social Security payments...if someone waits until 70 or so can they still get Medicare at 65? I am 72 and have been taking out SS since I was 65. I am still working (self employed) and really don't need the payments at the moment. Since my husband died five years ago his SS was combined with mine and I get penalized more and more; every year I get a letter from Social Security telling me that MY SS payment will increase due to my working income contributions. In the next sentence they than tell me that the total payment will stay the same, whatever I will receive as an increase will be deducted from the share I receive from my husband's side. Any solution for this dilemma? Thanks for a response......

TINA

From Scott:

Yes, you can and should take Medicare at 65. If you are still working and have health insurance from your employer, you need only register for Medicare Part A. You can defer taking Medicare Part B, which currently has a monthly premium of $88, until you no longer have health insurance from your employer.

If you are no longer working at 65 but choose to defer benefits, you should take Medicare Part B and then seek Medigap insurance as well as register for Part D, the prescription drug plan.

A surviving spouse gets the greater of the two benefits. So unless your benefit based on your work record exceeds the benefit based on your late husbands record, your Social Security benefit won't increase. There is, in other words, no solution.

Mr. Burns,

I am an avid reader of all your articles. I thank you for the education and am glad you continue to write albeit t a relaxed pace. I use your articles very often to help young people that are just getting started investing. The internet allows us to have so much information instantly. I wish I had been able to tap into it 30 years ago or had a few writers like you posting frequent articles in newspapers. You are an expert and I am not, but in my particular case, taking money out of an IRA not only creates an immediate tax liability and the loss of a portion of the distribution but also the loss of opportunity for that money to grow tax free. I just turned 62 and the simple calculation for break even for taking social security now or postponing is approximately 16 years. Getting to your example, taking $23,940 from one of your tax deferred accounts assuming an effective tax rate of 20% means the distribution in reality is $29,925 and you can get a safe 5% on that right now, beating inflation. Of course getting social security means paying tax on 85% on it. The calculation gets complicated with too many ifs — if I die young, if inflation runs amuck, if we go into a market crash, if we go into a bull market, if, if, if - too variables for simple analysis. My intuition is to take the money so I followed my nose.

Thanks,

Antonio

From Scott Burns:

In my case, I will have both earned income, investment income, and pension income so my expectation is that 85 percent of every SS dollar would be subject to income taxes. Deferring the benefit is painless. It also means my wife, who is likely to survive me, will have a much higher lifetime income. By increasing her Social Security income as a widow I am, in effect, taking out a life insurance policy and increasing the amount of money we can distribute to our children and grandchildren while we are alive.

I read all of your articles in the Houston Chronicle, and realize that your financial acumen far exceeds mine. However, your discussions on delaying Social Security seem to flawed and overly complex. In reality, the objective in taking one's SS is to maximize the amount we receive from SS over our remaining lifetime. Therefore the most important aspect of this decision is one's remaining lifetime from when the SS is started or taken. As such, each person should calculate a break-even point to see where, in years, the early decision equals the delayed decision in absolute dollars. I am not considering COLAs or other SS adjustments for inflation, since you get those on either decision.

I have not done scientific studies, but if you notice, most men die around 80, + - a couple of years. I believe the mortality tables will show even an earlier death date for someone at my age(62) or yours(65). Therefore, assuming 80 as the age we will croak, your column today illustrates my argument. If you took the $1,995 available to you last May, you will receive from SS $347,130($1,995 X 12 mos X 14.5 yrs) by the age of 80. If on the other hand, you wait, and take the $2,623 ay age 70, you only get $314,760($2,623 X 12 mos X 10 yrs) by age 80. This is a difference of $32,370 that you would have not received by the time of your death, at 80 years of age. The break-even point in your illustration today would be approximately 84.3 years of age. This was calculated by taking the difference of $628/mo and dividing that into the shortfall of $32,370 to see how many months it would take to make up the shortfall, and that is 51.5 months, or 4.3 years.

In fact, if you had started your SS at 62 years, you would have received $1,496.25/mo($1,995 X .75) until 80(your death), for a total of $323,190($1,496.25 X 18 X 12) from SS. Even this is $8,430 more than you illustration today, and that is starting as early as possible, with the 25% penalty.

In absolute dollars, your decision to wait or delay starting SS actually gets you less from SS in both cases, and there is always a break-even point for everyone when it come to starting at 62, or waiting to full retirement. Wouldn't it be more advantageous to your readers to show them how to calculate their break-even point when deciding to start SS early or delay it until full retirement or some other starting date?

Just so you know, my break-even point is 78 years, so I started SS at 62. Can't you have more fun with the money at 65 verses 78???

I enjoy your columns.

Jerry

From Scott Burns:

If you read the other answers you will see that there are two faults in your argument. The first is the simple assumption that most men die at age 80. They don't. At age 65 the average male has a life expectancy of 16.8 years. That means 50 percent of the group will be dead by age 81.8, which is slightly longer than age 80.

If you add the element of race, you'll find that some men live longer than others. Educated people with higher than average incomes tend to live longer lives. Less educated people with lower than average incomes tend to live shorter lives.

The second factor is marriage. The column was about married men. It was not about single men. Men tend to marry women who are somewhat younger (3 years, on average) and women have longer life expectancies than men. Since the surviving spouse gets the greater of the two Social Security benefits, the odds strongly favor someone getting a higher benefit for way longer than the breakeven period.

Reading your column on delaying taking social security reminded me of a previous column in which you recommended taking it earlier. You are confusing me. Your new logic appears somewhat convoluted. You don't seem to account for the loss of money by taking money from taxable accounts (taxes and investment loss). Also, my wife and I are in a retirement situation where we can invest much of her social secutity benefit. For example $20,000 invested in the market for 8 years at 9% is 20,000 profit or 2500 a year, admittedly at some risk. Investing it every year for 20 years would be a lot of money. What am I missing?

RNeal Houston

From Scott Burns:

I don't recall ever suggesting taking benefits early.   The investment aspect is covered in other answers.

My wife recently retired and began receiving SS benes at 62. We consulted 3 or 4 people at the SS office and they all said there would not be any substantial increases for waiting except cost of living. If she kept working and paying into the system, the benes would of course increase. I'm confused.

Faithful reader, Bill

From Scott Burns:

Sadly, you were misinformed. Visit www.ssa.gov and you can find plenty of information on how much your benefits will increase with deferral, including calculators.

When my eligibility date comes around I plan (if all things remain the same till then) not to defer my social security benefits even though I will not need the money at that time. Why? For two reasons: I believe, as someone with substantial retirement assets, the federal government will reduce or eliminate my benefit in the future so I want to "get it while I can". Secondly, as I get older my wants will diminish so the additional funds won't be spent or spent as efficiently (or effectively?) as they can be while I'm younger.

Oh, to have the resources I have now when I was 27……..

As always, your avid reader,

Tom

From Scott Burns:

I think that is a valid concern, though it may not be as great as you think. Let me tell you why. First, Social Security benefits are already "means tested" due to the formula for the taxation of Social Security benefits. The more money you have, the greater the odds that 85 percent of your benefits will be subject to the federal income tax. I don't see that getting much worse.

The other way to take the money back will start next year when your premium for Medicare part B will be levied on a sliding scale based on your income in 2005. While the premium for part B is $88.50 this year it is expected to rise to $93.50 in 2007 for most people. According to a report in the Wall Street Journal, however, those with incomes over $200,000 will pay $162 a month and those with income of $80,000 will pay $106 a month for their Part B. The change is expected to affect about 1.5 million people.

As to the efficiency of money at different ages, I prefer to take a positive view. As long as I am not wanting in the present, assuring resources for the future seems to be a sound decision--- even if one margarita will now do the work of two in years past…

Again I believe you are doing your readers a disservice, by advising them to delay Social Security benefits. Your article in today's Houston Chronicle omits a key factor in the analysis, which is the lost return on the money you withdraw to replace the defered social security benefits. Perhaps you should consider retiring from giving advice on personal finance.

Travis

From Scott Burns:

Tell me where I can get an assured 50 percent return in one year--- the difference between the $36,000 cost of a private joint annuity and the $24,000 cost of deferring benefits--- and I'll give serious consideration to your advice.  

Scott,

I always enjoy your column, but really liked the one in the Houston Chronicle today about delaying Social Security benefits.

My wife is 57 and I am 56, and we both work. I have been thinking of retiring and waiting on the SS benefits until at least age 67. Although your column did not address husband and wife both working and retiring, I was wondering about my wife taking early benefits at age 62 perhaps, while I wait to collect and continue to work.

She works part time now and is covered under my health plan at work.

Keep up the good work.

Gary

From Scott Burns:

If you wife earns too much money she will not benefit from taking her Social Security at 62. Remember, between 62 and her full retirement age she must return her benefits if she earns over a certain amount.

With that consideration, she should take benefits as early as she will benefit from taking them and you should defer them, maximizing your joint lifetime benefit.  

I just read your column in the Houston Chronicle today (10/02/06) and found it very clear and informative. I started benefits early some years ago, without benefit of your advice.

I have a follow up question regarding spousal benefits: If my spouse retires at her Normal Retirement Age, will her benefits be based on a percentage of my actual benefit amount, or will the percentage be based on my full benefit amount as if I had not rertired early? A literal reading of the FICA rules implies the latter, but not explicitly.

If the answer is "a percentage basis my reduced benefits", that would be a second strong argument for deferring the start of FICA retirement.

Best Regards, John

From Scott Burns:

Her benefit will be the higher or her work record or what she is entitled to under your work record, adjusted for her age at retirement.

I read with interest your article today about waiting to 70 for SS. There is still another benefit out there. I am a single woman 77 in Oct. 06 who did not start taking SS until I was 70 and didn't stop working full time until Dec. 05. My age 65 benefit was going to be about $860 per month, low for several reasons. My salary from age 65 to age 76 was 40 - 50% higher that it had been in prior years. My age 70 benefit was considerably increased because of the higher earnings from 65 to 70. The last five years my benefit has been recalculated retro to Jan. using my last years earnings and throwing out a low earnings year. I am now receiving $1,721 before medicare with still another increase this year for 2005 wages. My 1994 to 2005 SS benefits using actural yearly cost of living increases would have totaled $133,947. Beginning benefits at 70 I have already received $111,159. My mother lived to be 92, if I even come close to that I am way ahead.

PS I still work about 10 hours per month contract and today is a work day. Enjoy your column, read it every Monday.

Morning Scott … I'm writing regarding your recent column discussing the advantages of delaying taking S.S. benefits.

Your premise is based on "male, healthy and married" … while 2 for 3 is a great baseball average, does it ring true for a 63 year old diabetic (Type II) with 2 heart attacks to his credit? Otherwise, I'm still "healthy" with no physical restrictions, and work daily as the co-owner of an insurance agency. Our planning consists of $500,000 of Universal Life Insurance, and $350,000 of mutual funds. We make regular monthly deposits into our SIMPLE account. Our funds are fairly diversified, but uninspiring.

I enjoy what I do. But until I lose that desire and decide to retire, I have considered taking "early" S.S. benefits, and investing 100% of the money into stocks to supplement retirement income.

May I have your opinion on this option, and your recommendations of where my mutual fund dollars should be?

Rick

Dear Scott: I can afford to wait, but I did not, and I disagree with one of your major premises. Where I disagree the most is taking distribution out of the IRA instead of social security checks. I will wait until 70-1/2 because my IRA is also my emergency fund in the unlikely event that I need it for that purpose. If my wife or I need funds for medical problems, I can draw a lump sum out of the IRA. Also, you leave out the psychological pleasure of finally getting money back from the government after seeing a weekly deduction out of my hard earned paychecks for the last 40 years. That's a lot of paychecks. I started this year getting $1777.00 per month from social security and smile when I get my bank statement which shows the automatic deposit. To me, that is handsome pay.

Best regards, Larry

Please advise educators what we should do about the SS penalties affecting us. For myself, it means getting about  ½ of my SS benefits, and getting none of my husbands if he should died before me. Obviously, I would delay getting my SS benefits, but my husband and I are unsure what to do about getting his SS benefits. We are both TRS (Teacher Retirement) and plan on working until we reach the 80 years rule, which is age 63 for both of us. He also pays into SS at his place of employment. He has a small retirement from working at IBM. We have a small Tax Deferred Saving Plan from his IBM days. Our house is paid off and we have very little debt, $6,000. We do have a small savings and two daughters in college. I've paid into SS for 24 years, only 7 of those years are considered substantial. I haven't paid into SS since becoming a Houston ISD educator. Both my husband's parents died in their mid 60's. We don't plan on using his SS benefits for daily expenses, but we were going to save it. We wanted to save it for the future incase something happened to him and I'd no longer have this income. Our question is: Should we take the SS benefit as soon as we can and save it, considering the age his parents died at? Or should we delay getting it for as long as possible? Thank you

Beverly

You are probably the first person I have heard advocate the delay of receiving Social Security Benefits. I am surprised that you would advocate to defer cash benefits during a time when most people are reducing their income. I understand your logic, and it is an interesting concept. I will be in the position to decide whether to receive or defer my Social Security Benefits soon. I had just always thought that it is a no brainer to take the money and run. Although I have not had time to think much about your "investment opportunity", it is not the annuity replacement equation that will buy groceries, it is the Social Security Check.

Brian

Scott - for those of us who work for an educational institution that does NOT pay into Social Security, I feel I have to start drawing SS at 62 because once I start drawing out my ORP retirement---which I will have to do one or two years later---my SS benefits are cut by more than half. My wife and I both had our 40 quarters before we went to work for a community college and both of us are eligible for $400 and $300 a month in SS, respectively, once we turn 66. If we can put off touching my ORP and her TRS (which doesn't kick in until she turns 65), then we should take SS early. At 66, the gain of waiting disappears with our reduced benefits because the employer we will have retired from does not pay into SS. Am I missing something?

Jim Houston

Scott, I thought I understood your Social Security delay thoughts (using an inflation adjusted annunity) until I got to the paragraph that said " In other words, taking $23,940 from one of my qulified (tax-deferred) acounts over the next year will do the work of investing $36,111 next year.

What is the connection between the $23,940 figure and the $36,111 cost of the annunity ? (and what does the differential between these represent?)

Thanks,

Ray

Did you ask the Social Security Administration for the actuarial (or expected) present value - for unmarried men - of early versus full retirement benefits? It would provide a more direct measure of the relative merits of the choice.

We know that women live longer than men, and yet the reduction in benefits for early retirement benefits is done on the basis of unisex mortality tables. How does this affect the expected present benefits non-married men receive at early versus full retirement as compared to married men.

Just a thought, John

Do you really believe that SS can continue paying out scheduled benefits for another 14 years. There is nothing in the trust account but meaningless scraps of IOUs. James

Please set me strait on this: With no increase figured in over a ten year period. A person takes SS at 65 years of age at $1995.00 =$23,00.00 per year. Over ten years =$239,400.00 If he waits till he is 70 years of age he draws $2623.00 = $31,476.00. Over five years thats = $157,380.00 Seems to me thats a loss of $82,020.00. If you have the time correct me.

As a 52 year old female planning for the future, I find myself devouring many retirement articles such as your recent one on Social Security. Your column was very informative and removes the fuzziness about calculations. However, I did not think it was even-handed.

I do not have a spouse nor children. But I do have a fair amount of money accumulated. If I defer taking Social Security, then I have to use MY money in the interim. That diminishes my estate and the amount available to my heirs. I would much rather use the GOVERNMENT's money ( actually, it's money I put in, along with other workers). Although I do have a companion, he can't inherit my Social Security benefits and neither can anyone else. But once I spend my own money, it's gone for good and of no use to anyone else, either. Even someone with a family would need to carefully weigh the cost and rewards of spending down their estate.

Secondly, information about average life expectancies, etc is common knowledge. But my father died unexpectedly of a heart attack at 62 after collecting only 2 Social Security checks. His brother died of lung cancer at 61 and my other uncle (on my mother's side) died of liver cancer at 58. No Social Security benefits there! Wait, I take that back — there were widow's benefits. Regardless, I chalk up their premature deaths to bad luck. But, if someone doesn't absolutely NEED to squeeze every penny out of the Social Security benefit, then it makes sense to me to activate it as soon as you can. Once the candles start to crowd the birthday cake, 14 years of "catch up" is a long time.

Lest you think I'm in it for all I can get, I'll mention that I am very much in favor of Social Security reform. I think a combination of reforms is urgent and necessary. That means: decreased benefits, delays in benefits and any other creative solution. Everybody needs to give up a little bit if we don't want to overburden today's young people. I like the idea of personal accounts or something like it. I don't like President Bush but at least he was having the dialogue.

If I'm really off base, you can let me know! Anyway, keep writing sensible, informative columns. Thanks.

BG Gloucester, MA

I've been enjoying your column in the Boston Globe but found myself a bit confused after reading this ayem's piece about Social Security benefits. I considered posting a comment on your web site, but am not really anxious to open up online and opted to send this as e-mail instead.

Your lede strikes me as a bit misleading by asserting that the alternative to "investing" nearly $24k by putting off applying for benefits is to spend $36k on an annuity. Calling this a 50% return on investment seems disingenuous at best, kind of like your spouse telling you how much he/she saved by buying a Rolex on sale while totally ignoring the question of it being a wise or necessary purchase.

I am a few years younger than you, have not spent my lifetime involved in the field of investment and finance, and have a growing interest in all things related to retirement. The question of when to begin taking SS benefits is one that I have only begun to grapple with. But I found myself reading and re-reading your column and even created a spreadsheet so I could parse the possibilities.

It seems to me that your comparison of the cost of an annuity vs. spending down your savings for a year ignores a third alternative; take the SS benefit now and create your own "annuity" by continuing to save the money you already have. Using the figures in your example, an investment appreciation rate of 6% and a COLA of 2%, adding only $1,000 to the $23,940 you wouldn't have to spend would provide an income stream that would last for 25 years. Now I know that an annuity eliminates the risk of market performance when making regular disbursements from an investment account, but find myself unconvinced that the security of maintaining this additional income stream is worth spending either $24,000 or 36,000. In other words, why buy a Rolex when a Timex will do? Or am I missing something?

In any event, thanks for listening and getting me thinking about this.

Best regards and good luck in your new career,

- John

I have read and enjoyed your columns in the Dallas Morning news for years. They are always a favorite topic of discussion among my friends. I read your column in the October 1st DMN titled "Men, opportunity is knocking for you" today. I would like to share with you the 'home brew' Excel spreadsheet I used to decide whether to take my Social Security payments early or defer. It is attached. While my situation is not apples to apples with the one you described in your column, I think it is very close.There are two tabs on this spreadsheet. The 62 vs. 66 tab is the one I used to decide to take mine early at age 62. The 66 vs. 70 tab attempts to duplicate your scenario as closely as possible. First, my situation. My wife and I both took early retirement and rolled our pensions and 401k's into IRA's. We make monthly withdrawals from my IRA supplemented by my Social Security check. She is not old enough for Social Security or IRA withdrawals without penalty. Every dollar I draw from SS is a dollar I do not have to withdraw from the IRA to maintain a certain level of income. Second, the spreadsheet. Specifically the 66 vs. 70 tab. It is set up so that you only have to enter 3 values in the grey boxes. The amount off the Social Security statement listing the monthly amount at age 66, the same for age 70, and the expected rate of return. The figures you see on the tab are from my benefit statement from November 2005. The 66 column shows the cumulative amount each year of how much money you would receive if you apply at 66. The 70 column does the same. The delta column in between reflects the difference each year in what you would have received in total up to that point. It shows that the line crosses at age 79-80. If you start at 66 you would have drawn 233k by age 79. If you wait until age 70 to apply, you would have collected 230k at the same point in time. If you live past 79 you would have drawn more if you had waited. The reason I chose to take the benefits early are demonstrated in the Build up and B/W columns. The $22,824 I wouldn't have to withdraw would stay in the IRA and draw compound interest for four years and be worth $102,696. That amount would be an increase to my existing IRA and draw compound interest until I exhausted the IRA. The B/W column is merely the difference between the Delta and Build up columns. It is how much better off/worse off I am if I delay benefits. You simply plug in your expected rate of return and see if the B/W column stays in the black longer that you live. I have plugged in 7.9 percent just to show that it is the break even point if you live to be 100. It is 7% if you live to be 90. What am I missing? The figures you see on the 62 vs. 66 tab are the ones I used to make my decision to take the benefits early. Even though the wife and I have enjoyed a 14% return the last 4 years (more specifically 11.93% in 2003, 15.33% in 2004, 14.42% in 2005 and 13.28% in 2006: I am a firm believer in the Monte Carlo Principle) and will double our money at the current rate in 5 years 5 months I base all our decisions on a rate of return of 8.5%. Please tell me what I'm doing wrong. Or was the article based on a situation different enough from mine to arrive at a different conclusion. Thanks Ken

I read your article on waiting to file for SS. The article was over my head, maybe I am too lazy to think that hard.

I am 62, have filed based on this: $1273 X 48 MONTHS = $ 61,104 MONEY RECEIVED BY AGE 66 FULL RETIREMENT AGE $1273 X 192 MONTHS = $ 244,416 MONEY RECEIVED BY AGE 78

$244,416 DEVIDED BY $1697 (FULL BENEFIT @ AGE 66) = 144 MONTHS 192 (MONTHS)-144 (MONTHS)= 48 MONTHS My thinking is why wait 16 years to break even on the pay out, not counting any interest income.

The $61K in the bank at age 66 seems better than hoping I live past 78. What am I missing or overlooking?

Thank you, Russell

Thank you for your columns. They consistently tend to give me hope for the future. And hope is what many of us need. I am a 62 year old male (63 in December), married to a 57 year old woman. We have been married for 14 years, have no children and own a home which we bought as a "fixer-upper". The home and the adjoining lot which I purchased will sell on the market for probably $250,000 - $300,000, after all the personal sweat we have put into home and the yards. As unbelievable as this may sound, neither of us had a dime when we married. I was a brother in a religious order (no money, vow of poverty), she had worked for various social causes over the years. We have less than $100,000 of debt. Autos are paid for, even though they are growing older they are in good condition. All debt is in mortgage. We are savers, except for our passions: the house, the yard and our two dogs. Since my wife is an artist, we built a studio in our yard for her work, using a home improvement loan. We did the bulk of the work ourselves. Our debts are in our mortgages (5.25% and 6.75%). I hope to pay them off as quickly as possible. I am self employed, as a marriage and family therapist. My wife and I also established and run two Employee Assistance programs, one for a university here in San Antonio and one for a beer distributorship! Both are capitated at affordable rates for the employer. My wife does all my billing and accounting from our home. Our combined incomes are around $85K per annum. Of course, I have to carry liability and health insurance, rent etc and pay her. But net is about $85,000. I have been thinking about whether to take retirement at 65, wait until 70 or go somewhere in between those two figures. At age 70 my SS income would be about $2200. Of course, I am concerned that my wife have the best possible financial arrangement for her after I pass. I carry about $330k in life insurance (all term life). I also own 50 acres free and clear in Wilson County, an area known as the "sandhills" and of little worth for agriculture. However, developers are looking at it for residential development. The intricacies of that (on hold for now) are topics for another discussion. Ask for a price for the land or go with the release and participate option, with a lien on the property. I am uncomfortable with the slick demeanor of the developers. When I called off the deal 6 weeks ago, we went separate ways. They contacted me last Friday and want to set up a meeting. I have about $186k in retirement savings, ranging from Alliance, American, Evergreen funds. Included in that figure is about $55k in an Equitable annunity and about $12k in a MetLife annuity with a death benefit. My financial adviser is Brent Forrest with LPL. My health has been good but over the last year and a half I have had a bout with cancer (esophageal) which appears to be over now. Only one in ninety men survive it. God bless MDAnderson. My wife is in good health. We pay about $700 a month for health insurance currently. I retain a lot of energy. But I am concerned about my future levels. I think I can work till age 70 1/2 and draw SS then. Everyone says to draw it at age 65 and save the money, that I'll never be able to make it up. Besides, they say, there may be nothing in the SS trust then. In truth, my primary concern is to leave my wife with a good monthly income if I pass before her. Do you have any advice for me? We are deeply entrenched in our community and would not like to leave it to travel, motorhome or otherwise. Besides, we have always been workday people. But we would like to be able to take occasional retreats to the beach or visit friends around the country. Should I consider the Vanguard account, perhaps taking the Evergreen and Alliance funds to buy into the inflation adjusted annuity? I would have about $60k to do so. Would I be taxed on these funds or could I simply roll them over? Would that be a good option for us now? I know you are busy and appreciate your reading of this long missive. However, I really would value your opinion on how to further plan for the future. Thank you for your kindness.

Charles

The question is, will SS be here when we do take our deferred benefits?

James, Dallas

The headline on page 6D is terribly misleading... "you will reap the reward" simply isn't true in enough cases to hold water. I'm one of those born in 1940 and before taking my social security at 62-plus years I did the math. I would have had to live until at least 75 to break even and with a heart attack already behind me, it didn't make sense to put it off. Yes, if I live beyond 75 I will have lost some money. I'd ask you to remember how honest the social security system was from the beginning. When it was set up, the government set the age for collection above the average life expectancy of the very people it was supposed to help. In other words, they wanted to collect and not have to pay out. I'd like to see you do the same column, providing advice to those who have medical histories, on taking their social security early or late. I do read your column and I do agree the vast majority of the time with what you have to say. Just not this time.

Gary, Holly Lake Ranch

Scott,

As usual, I read your column with Internet. More of us might make those type decisions if our Social Security office were more of a counselor and gave us options. When I applied for my age 65 and 6 month retirement, I was encouraged to not wait a couple more months and take it now. I resisted that, because I knew better, Had I known what you just wrote about, I may have waited longer. At least I would have been able to make a better informed decision.

Thank you for your column,

Retired and working in Rockwall,

I am confused by your column. I thought that Social Security calculated deferred benefits in an actuarially neutral manner so that the payout on average is the same regardless of your choice start dates for collecting benefits. So why is there such a large discrepancy between what Social Security gives you for deferral of benefits and what Vanguard charges for an annuity? Is Social Security paying out too much or is Vanguard charging too much?

Today I read your article about deferring social security benefits.

You omit one important factor. If a man's spouse has not been employed, she receives 50% of his benefit if he retires at 65. But she does NOT receive 50% of any additional benefit that he receives by deferring social security payments. And she does not collect any benefits during the time he defers benefits. Because she will lose the benefits during the several years he defers benefits until, say, age 69, and never receives any increase above what she would receive annually if she started to receive payments when the husband is 65, I think the married couple would be better off receiving benefits as soon as eligible, especially since he can now receive benefits while continuing to hold down a job.

Maurice

A couple of questions. If I am following your SS deferal logic, it would take 14 years to recoup the cash loss for delaying drawing SS from age 65 (and a half) to age 66 (and a half). am I correct in this, and if I am, how many more years would each succeeding year you delay take to break even on?

Thanks for your column g

I read your article with great interest, as I have many others. I am one of those men who will need to begin taking Social Security benefits at age 62, and I recently received information from the SSA that I would like you to comment on.

A benefit confirmation letter indicated the following: "The monthly earnings test applies only to 1 year. That year is the first year a beneficiary has a non-work month after entitlement to SS benefits. Our records show that you had or will have at least one non-work month in 2007. Therefore, we will pay you benefits for years after 2007 based on the total amount you earn each year." What is that really saying?

I also read the following in Publication 05-10077 'What You Need To Know When You Get Retirement Or Survivors Benefits': "If you are younger than full retirement age and some of your benefits are withheld because your earnings are more than $12,480, there is good news. When you reach full retirement age, your benefits will be increased to take into account those months in which you received no benefit or reduced benefits."

That does sound like good news, if I'm reading it correctly.

I really enjoy, and am encouraged, by your articles.

Sincerely, Larry

I urge you to double check your life expectancy tables. Discover the odds against you or your wife reaching 95.9 years alive are far poorer than 50%

Realize that the 25.9 years now start at age 70 and not 65. This error is significant enough to publish a correction. Also suggest you find a new financial advisor.

(Started SS in Jan '06 at 65.5. In my case I expect to go age at 75 and my wife at age 82. I expect 'Financial Advisors' to start ringing the phone off the hook before my body reaches room temperature to separate my wife from her savings. Though at least one will probably be successful, she'll still have the "65.5 level" SS.)

  

From Scott Burns:

I'm going to assume you are responding to the 10/1/06 column about a real life case for delaying Social Security benefits. While the odds of an individual living to age 90 or 95 are poor, the joint life expectancy of a 65 year old couple is about 25 years, indicating a 50 percent chance that one of them will live to age 90.

With respect to the issue of women and their SS benefits: your advice to women to go ahead and take the benefits early is ONLY relevant if the woman doesn't have her own, and will have to rely on the portion of her husband's benefits.

I am 14 years younger than my husband, but have my own SS account from 40 years of full employment. Half of his will be way less than all of mine.

SO. Do I conclude that I too should defer receiving my benefits until age 67-8?

Why didn't you factor in the additional cost of paying into Social Security? You are continuing to work don't you continue to pay?

  

From Scott Burns:

The employment tax on continuing to work is a separate transaction: you would not pay it if you were not working and earning.

Dear Scott,

This column really hit home with me as I was 65 in May and can start receiving benefits at 65 + 8 months.My SS advisor suggested I entertain taking the benefits as early as possible because it would take years to make up the difference if I worked 3 more years. I would like to throw a variable into the equation for your opinion. I have two rental properties that would yield $1000 t0 $1200 per month after taxes, insurance and maintenance if they were paid off.

By taking the benefits in Feb '07 I could pay the notes off on these properties in the three more years I plan to work and realize the $1000 to $1200 per month as income. What do you think?

Lloyd

From Scott Burns:

The "slam dunk" case for deferring Social Security benefits is for a typical married male. Even if he doesn't live long enough to break even on the benefits deferral, it's highly probable that his surviving spouse will.

While your life expectancy at 65 years and 8 months is longer than the 14 year break-even period, your joint life expectancy is about 25 years.

The other issue your Social Security advisor probably isn't considering is income taxes. If you plan to continue working there is a good chance a substantial portion of your Social Security benefits will be added to your taxable income. So the amount you'll have left after taxes will be less than what you receive.

The best way to estimate the impact is to spend some time with your tax accountant. You can 'guestimate' the tax impact, however, with a simple formula. Assuming you are married, your benefits won't become taxable until your other income exceeds $32,000 less 1/2 of your Social Security benefits.

Here's an example. Suppose you and your wife collect $30,000 in benefits. That means any income over $17,000 (remember, the formula is $32,000-(1/2*your benefits))will engage the taxation of benefits.

After that, each additional dollar of income triggers 50 cents of SS benefit taxation up to $12,000 of additional income. You can thank Ronald Reagan for that.

Once your additional income exceeds $12,000 each additional dollar of other income triggers 85 cents of SS benefit taxation. The maximum amount of your SS benefits that can be taxed is 85 percent. You can thank Bill Clinton for that.

Now put it together in steps:

• First, you can have $17,000 of income without triggering benefit taxation. (The actual figure will depend on your benefits, as per the formula.)
• Second, you can have an additional $12,000 of income and trigger taxation of $6,000 of benefits.
• Finally, each additional $1,000 of income over $29,000 will trigger taxation of $850 of benefits.

I know eliminating debt is very attractive. But the thing to remember is that the increase in your deferred Social Security benefits isn't a flat sum, forever. It is indexed to inflation. So while the value of your debt repayment schedule will be diminished each year by inflation (you'll be paying back less purchasing power) the value of your increased Social Security benefits will be holding their own.

Thanks for a great column in today's paper. Unfortunately, my husband is pushing me to start benefits at age 62 (next February), and I would prefer to wait longer, agreeing with your position. How's this for a "compromise?" What if I take that $1000 per month(after taxes) and put it away in 5% cd's for the next 3-4 years? Would that end up putting me in about the same position as waiting til age 66? I am no mathematician, so I can't figure it out. Please help!!

I'm sure you wouldn't remember me, but back 3 years ago, when you advised buying the Toyota Prius I wrote to you, suggesting the Corolla and putting the difference in the bank. It seemed to work out cashwise (until Friday, when an inattentive driver hit me nearly head-on and took the front end off my dear little car!)

Thanks for your fine columns and well-reasoned conclusions. Love your columns!

From Scott Burns:Thank you for your kind note. I am sorry for my slow response; I have been inundated with email lately.

Married women who earn less than their husbands don't benefit as much by deferring benefits as others because they are likely to eventually get the larger benefit their husband earned. So your priority should be on having your husband defer taking his benefits.

You can take your benefits and save the money but you are likely to have to pay income taxes on them. Fortunately, the tax rate will be low for your benefits due to the amount.

If you and your husband have limited investments, taking the benefits and saving them might be a very good thing to do because it would increase your financial flexibility.

Please stay tuned to www.scottburns.com for all of the latest information and updates.

I look forward to continuing my writing and helping where I can. Thanks again!

P.S. You aren't the only one who made that suggestion and it's good thinking. My wife and I enjoy getting 47 mpg in our 2003 Prius but it did cost more than a Corolla. Both of us like the Prius because it is very, very quiet and smooth as well as fuel efficient.

Nancy

Hello Scott,

I have been researching through the Internet: "Social Security: When should you start collecting?" I came across your web site and found it very interesting. I have a question that you probably don't come across everyday so I thought you might be interested.

Here are the facts:

My wife was born in 1942 and I in 1952. Thus I am 10 years younger. She has not started collecting SS and is still working. I am still working. Currently we plan on working full and/or part time past our respective 65th birthday.

For my wife: At 65 and 10 months her benefit will be $1,461, at 70 $1,923.

For me: At 62 $1,405; at 66 $1,905 and 70 $2,538.I keep seeing examples where the husband is older than the wife and often they say the wife should optimize their benefits by taking them early at age 62 and the husband on the other hand, should defer benefits until 68 or 69.

Is this the flip side for us since I am 10 years younger?

Many thanks for any information you can provide to help us.

Sincerely,

Ray, Phoenix AZ

From Scott Burns:

Interesting question.

Typically, men marry women who average three years younger at the first marriage. Men marry still younger women in the second marriage.

The combination of longer life expectancies for women and being younger increases the odds they will outlive their husbands by a substantial margin. That, in turn, increases the odds that someone will benefit when a man increases his Social Security benefit by delaying receipt.

Your situation, however, isn't worked out in the Center for Retirement Research paper. My guess--- and it is just that, a guess--- is that you would have little or no benefit from delay because your wife's basic benefit is so close to yours she would only benefit if you deferred well past 66 and she might not outlive you.

Hi Scott

I'm 34 years old and, despite my master's degree in public policy, a little confused by the numbers Social Security sends me in their little green and white "Social Security Statement" mailer.

They say that if I retire at age 67, my payment would be $1984 per month, less if I retire early, more if I defer.

What I can't figure, despite having read the mailer cover to cover, is whether they're talking in terms of today's dollars or whether this is their projection of the actual dollar amount I'll receive in 2039. Obviously two grand a month in today's dollars sounds a lot better than two grand a month in 2039 dollars.

Any help here?

  

From Scott Burns:

They are talking in terms of constant dollars. Your benefit would receive an additional upward adjustment each year, to reflect inflation. If inflation averages 3 percent a year, your future benefit would be about $5,262 a month--- even though its purchasing power would be the same as $1,984 today.

Sadly, the increase in nominal dollars will have a terrible side effect--- you will pay much more in income taxes than someone retiring today on the same purchasing power.

How can this be?

You can thank politicians of both parties for this generational atrocity. The formula for the taxation of Social Security benefits is not indexed for inflation. For a single taxpayer, your Social Security benefits start becoming taxable when half your benefit plus your other income exceeds $25,000. Since your future benefits will be about $63,144, half of which is $31,572, you will have triggered the taxation of your benefits without ANY income from any other sources.

This tax inequity for the young is why I have suggested that young people should prefer Roth IRAs over traditional tax deferred savings. It is also why I have advocated scrapping the entire tax system and replacing it with a national sales tax.

This tax was passed in 1983, when you were 11 years old. Today, we call that generational inequity. But in 1776 the same kind of thing was called "Taxation without Representation."

John

Dear Mr. Burns,

In your recent article: "Do The Math: Deferring Social Security Pays Off" (10/22/06 Seattle Times) you mention that your social security benefits would increase by $11.63 a month until your monthly benefit would reach $2623.00 as opposed to $1995.00 if you collected the benefits at an earlier age. I am having a devil of a time figuring out how, (why) that number,$11.63, is provided? It seems as if your monthly benefit increased by $628.00 a month by waiting the 54 months. Forgive me if I am overlooking the obvious or failing to understand how Soc Sec increases benefits but if you forgo 54 months of $1,995.00 it seems that indeed $628.00 per month will fall short of recouping the difference.

I wil keep working on this and thank you for your time. Dan

  

From Scott Burns:

It may make more sense to you if you consider a shorter time period. If I defer taking benefits for 12 months I will miss $24,000 in benefits. My delayed benefit, however, will have increased by $11.63 per month or $140 a month or $1,675 a year for the remainder of my life and that same increase will go to my surviving spouse when I die--- a period likely to be at least 25 years long. In addition, that $140 a month additional benefit will be adjusted for inflation each year for the next 25 years.

If I took the $24,000 in benefits and did not have to pay any taxes on them, what investment could I make that would do the same thing? That $1,675 a year represents a 7 percent return on $24,000. I could invest the money and take the risk of the stock market but the odds are that I would deplete the investment long before death.

A joint and survivor life annuity that guaranteed $1,675 a year, adjusted for inflation, would require an investment of $36,000. Giving up $24,000 to have a benefit that would require a $36,000 investment looks like a slam dunk.

Deferring Social Security looks even better when you consider taxes. If you have enough income, whether working or retired, that your Social Security benefits will be taxed, then you'll have less money to invest in a substitute for deferral. Every year, more and more retirees are discovering that they must pay taxes on their Social Security benefits.  

I don't understand your Oct. 22 column at all. At one point you say your monthly benefit will increase by $11.63 cents for each month you don't take it, but then later you say the benefit will increase by $139.56 per month. That is within one year? It goes from $11 to $139 more a month within a year? Are you really saying that?

Also, at the end of the column you say that you or your wife will live to collect the annuity (by which I think you mean social security) for 25.9 years? And you're putting it off until you are 70? And you're already 65 1/2? Is this a much younger wife? This sounds insane to me.

Of course your column specifies males and I'm a retired female who is not yet old enough to draw social security.

I never agree with your columns, so perhaps you are just too smart for me. But I'm doing okay just the same.

Jyotsna

  

From Scott Burns:

The rate of increase is $11.63 per month, per month. Multiply that by 12 months and you get $139.56 a month of benefit increase for a year of delay. That means my annual income will increase by $1,675 a year if I put off taking benefits for 12 months and forgo $24,000 of benefits.

Now, divide $1,675 by $24,000 and you'll find that's a "return" of 7 percent a year. That's higher than any bonds currently available. In addition, the $1,675 will be adjusted upward for inflation each year. You'll have a tough time finding a stock that yields 7 percent a year with an annually increased dividend. To purchase a life annuity that would be adjusted for inflation I would need to invest $36,000.

The joint life expectancy is a bit more difficult to understand. My life expectancy, at 66, is about 16 years, to age 82. My wife is 2 years younger, and a woman, so her life expectancy is about 20 years, to about age 84. Because we are dealing with the survival of two individuals, not one, the actuaries figure that our joint life expectancy--- the 50 percent chance that one of us will live this long--- is nearly 26 years.

Remember, life expectancy isn't a deadline. It's just a measure of how long the average member in a population sample will survive. Half will live longer, half will die earlier.

Mr. Burns,

I read your recent column on delaying social security benefits.

First, I was surprised that the man who hates annuities was suggesting purchasing an annuity.(Can you imagine, the wasted mortality expense, management fees and other hidden 12b-1 fees.) However, the cost would have been significantly less if you had gotten a quote on a single life annuity which is more fitting for a situation that will copy the results of social security.

More importantly, you wrote, "they would be better off taking money from their taxable savings or IRA accounts and [defer] the benefits;" which I think is very short sighted. The money in savings — taxable and IRA — is available to the widow and other heirs and the social security benefits will not be available to the heirs and possibly not the widow with consideration of WEP and career spouse. Further, the life expectancy for single men with no children or grandchildren is pretty poor for 66 year olds.

Finally, the Pension Preservation Act recently enacted provides for a new life expectancy table for pension calculations. If over the next year it is decided that Social Security will use the same life expectancy table (extended 5.7 years) then benefits will fall for those who have not turned on their benefit yet.

I gathered from your statements that you suggested an individual use personal assets and delay turning on social security all to get an additional

$ 1,675. per year in benefit. I have read some calculated suggestions that a man two years older than his spouse should have the spouse turn on the benefit at age 62 and then wait till until at least full retirement age to turn his own. I can certainly think of scenarios where that would not work either…alas, the scenarios.

In general, I would recommend a man turn on benefits whenever he retires and is no longer earning wage income and if that is 62, don't count the pennies because the time value of money makes more millionaires than anything else. Therefore, give me mine as soon as possible.

But a prudent man should examine all the possibilities and know all the things most people don't know.

When I was in 5th grade a very old teacher made the statement, "if it is in print, it is correct." I think she was thinking punctuation and maybe had not read much free verse or prose. Anyway, in the internet world we have learned that statement is totally false. The same can be said for statistics and mathematical computation.

Party today, because tomorrow we may die.

Ed

From Scott Burns:

Thanks for your note. Actually, I don't hate all annuities. I just have no use for the vast majority of variable annuities because the expenses are greater than the benefits of tax deferral, particularly since the tax rate on capital gains and dividends has been reduced to 15 percent.

I think we'll have to agree to differ on the Social Security benefits question. The math done at the Center for Retirement Research at Boston College supports delay, as does use of sophisticated financial planning programs like ESPlanner.

Mr. Burns,

I read an article concerning Social Security you posted in the Dallas morning news. You mentioned that by delaying social security could provide an effective return of 50%. I did understand your article but have a different approach that I would like to have your opinion on. You mentioned that your social security would be approximately $1,995 month at your full social security age. You mentioned that the benefit will increase to approximately $2,623 a month by the time you reached 70 (54 months later). Since you have reached your full retirement age earned income will not affect the amount receiving. Why not take the $1,995 month for the next 54 months which will equal 107,730. Invest the monthly amount each month in a 5% CD (certificate of deposit). That would equal approximately 130,000 after 54 months. The difference in the social security amount is 628.00 month. The 130,000 will provide a stream of income at 5% rate of return equal to 541.00 month. The difference is 87.00 month. Now the difference is 87.00 month or 1044 year. You now have created a 130,000 asset to pass on to heirs. Not to mention while you are working you can participate into a Roth IRA.

This email is meant as a question and should not be taken as disagreement with your article. Please let me know what you think. I anticipate your response. Please respond directly to my email for I do not check your column daily. Thank you for your time.

Sincerely, Mark

From Scott Burns:

Since I am still working and in a high tax bracket, virtually all of any Social Security benefits I would take now would be subject to taxation. That would reduce the net amount to save. The same high tax rate would also reduce the net amount of interest accumulated. Deferring benefits is like having a deferred account and I could not possibly get the effective return in an investment.

At the end of one year, for instance, I would only have about $17,268 left after taxes on my Social Security benefits, assuming a 33 percent tax rate on 85 percent of the benefits. The increase in benefits, however, has an annuity value of $36,000. Even though the income would be taxable, regular investing doesn't come close.

By increasing our Social Security benefits I can reduce the rate of withdrawal from our investments both now and in the distant future when my wife survives me. My "bet" is that we'll have a larger estate AND a larger lifetime income by deferring benefits.

Vanguard also makes a good case for deferral of Social Security benefits in its latest issue of MoneyWhys, IF one can afford to wait and has a good health history. They also recommend visiting the following site: www.ssa.gov/retire2/otherthings.htm

From Scott Burns:

Yes, that Social Security URL is a good one, as are the embedded links. Here's the link to another columnist making similar observations.

Columnist Alan Sloan on the value of inflation adjustments http://www.msnbc.msn.com/id/15460707/site/newsweek/

I must say I've read a number of articles urging folks to defer taking their Social Security benefits. It doesn't effect me yet (age 57), so I never bothered to check into the issue in detail.

However, your recent article in USAA magazine had hard numbers in it, so I decided to do a (very) quick and dirty analysis of my own.

Please note the attached spreadsheet which assumes Social Security proceeds are simply invested (never needed to live on)...based upon fairly realistic assumptions, it seems to me you don't "break-even" by deferring 54 months until after 19 years (age 83.5)...and even deferring only one year requires 17 years to make up for the lost cash flow...not exactly a "no-brainer" from my perspective.

I tend to think this is a more realistic way of looking at it than trying to bring an annuity into the analysis.

Regards, Cliff

  

From Scott Burns:

I beg to differ. If you know when you and your spouse are going to die then, by all means, use the break-even analysis method. If your death dates are before the break-even, deferring benefits is silly. If your death dates are after the break-even, then deferring benefits is a good idea. But if you don't happen to know when you are going to die, the life annuity purchase approach is the best way to test the tradeoffs.

Scott,

Happy Holidays to you. This week I received the USAA Winter 2006 magazine which contained your article entitled "Delayed Gratification".

I am one of the owners and operators of http://www.financialmedic.com/ . In developing the retirement planning service and now while it's in operation, we spend considerable time testing cases. I looked at the case in your article but came to the conclusion that "it makes sense to take your money and run".

Using the numbers in the article, the additional $1675 gained by delaying the start of social security payments will grow (my assumption) with an annual inflation escalator of 2.5% to $1764 per month at the end of the 26 year retirement period. But to fill the income gap, the client will have to withdraw $23,940 ($1995 per month) of retirement funds which will be taxed as ordinary income. In the 15% incremental tax bracket in effect the client will see $1696 per month after taxes.

Rather than compare the benefit of delay to a one time annuity, I suggest that the better option is to keep the $1995 in an IRA which has been growing at a 12% per annum for the last five years. After 26 years, the monthly asset has grown to $2584 which is 46% more than the $1764 gained form the delay strategy. Understood that the $2584 is before tax and there is no certainty that the fund will continue to grow at 1% per month. But that 46% differential certainly provides a cushion against the tax and risk factors.

What am I missing? Thanks in advance for your response.

peter

  

From Scott Burns:

The question is about lifetime income for consumption. It is not a speculation about accumulation.

If you defer taking benefits for one year you lose $23,940 of consumption. If you take $23,940 from a retirement account, that money will be taxed. The $1675 annual gain in benefits with lifetime inflation adjustments, however, has a lifetime inflation adjusted annuity value of $36,000. If you assume that NONE of the Social Security benefits will ever be taxed, deferral is still worthwhile because you would only have to take $28,164.70 ($23,940 divided by 0.85) to have $23,940 of spendable income. That's still less than the $36,000 you would need to invest to get the equivalent increase in lifetime income by deferring SS benefits.

While many people without other resources will have to take SS benefits early, many of the people who will consider delaying the benefits will also know that their benefits will be subject to taxation.

  

I appreciate you prompt reply. I realize how many folks are asking for your guidance. And you probably don't have time to reply to a reader more than once. Nevertheless I want to try to get another response from you because I still do not agree that delaying retirement benefits is the right course of action, at least not for me. Let the numbers make or lose the case.

Here is what my case numbers say: if I take SS @ 62 for consumption use, I can leave my IRA funds invested and earning the 12% per year that I have averaged for the last several years. The funds I would have to withdraw if I did not have the use of my pension are equal to what my pensions will be over the four year period from 62 to full pension at 66. I assume a SS annual inflator of 2% and that sum in the IRA will grow to $102, 888 by the time I am 66. Starting at 66 for the next ten years the pension started at 62 will, growing at 2% per year, produce $221, 797 plus the $102,888 for a total of $324,685. Taking the alternative of waiting until 66 to start SS, the annual of $26,844 (versus $20,256 for the start at 62) will produce $293,934 over the ten year period. So I have accumulated $30,751 more by taking my SS at 62 and "running". Perhaps taking the annuity option is less risky and leads to your conclusion that waiting until 66 is preferred. Perhaps extending the future value cash flow analysis until 90 will turn the tide. Perhaps there is a tax consideration.

But rather than me speculate, I hope that you will have time to drop me a note pointing out the fallacy of my calculations.

Thank you, peter   

From Scott Burns:

One issue is your 12 percent assumption. While you may have averaged 12 percent in recent years, you should consider that those years followed 3 years of market decline and that the return on large cap equities is just over 10 percent a year. So you are taking a great deal of risk with a short horizon portfolio.

The second issue is taxation. By letting your IRA assets accumulate you are positioning for a higher RMD when you turn 70 1/2 . That, in turn, could mean that you would cause some of our Social Security benefits to be taxed. Were that to happen, each additional $1,000 of IRA withdrawal that is taxed at 25 percent could add $850 of Social Security benefits to your taxable income, adding another 21.25 percent to your effective tax rate on that $1,000. Some financial planners are calling for delay of Social Security benefits and aggressive use of IRA assets for spending for just that reason.

Dear Mr. Burns,

I appreciated your thoughts in the recent USAA Magazine regarding delaying taking Social Security benefits. That's our plan, too, but it's not strictly a "payback years" numerical decision. My wife works every day with senior citizens, and we see repeatedly that the real danger is not in dying early and "losing" postponed benefits, it is in living long and having smaller fixed benefits that won't cover increasing expenses for medicine and care when it's most needed.

The logic of your argument is sound and the advice is excellent, but it's an unfortunate reality that many folks do not have the extra investments to tap for that initial year or two or three of retirement without Social Security benefits. Those same folks do, however, often have considerable equity in a home. Would it make sense for them to take out a reverse mortgage to fund the initial retirement years so they can have better Social Security benefits later, or would it be better to take Social Security early and tap the home equity later, if needed?

Sincerely, Dudley

  

From Scott Burns:

Reverse mortgages are getting better but they are still very expensive ways to access your home equity.

More important, by the time most people are thinking about a reverse mortgage it is imperative that they down-size or rent rather than trying to maintain the amount of shelter they own. As a practical matter, most people thing about reverse mortgages when they have virtually nothing in other assets. So they are overcommitted in shelter by definition.

I read your article of 12/7/06 re how to calculate ss benefits and went to the site referenced therein. I still have a question.

Assume I am 58 and have worked for 35 yrs paying the max in ss. I received my statement re ss benefits to which I am entitled if I retire at 65 with the caveat (we assume you will continue to work and make about the same as you did).

I quite work now. Will I receive less in ss even though I worked for the required 35 yrs and paid the max.

Regards,

Joe

  

From Scott Burns:

If you have put in 35 years at the max I believe having some zero years will have no impact on our benefit when you eventually take it because your benefit calculation will be based on your best 35 years. Social Security has three calculators for benefits, all available online. If you want to experiment with this I suggest that you use the second calculator (not their quick and dirty one) that requires input of your earnings record, and experiment with the results.  

Scott:

I'm a West Point graduate with 34 years with 3M and have enjoyed you syndicated column in the Minneapolis Tribune for many years. I was disappointed they dropped your column this year.

I'm planning on retiring next July and have given quite a bit of thought to the finanicial implications of this decision--if fact, I'm considering doing some financial planning myself.

I just read you "Delayed gratification piece in the USAA Magazine and was intrigued by your reference to an annuity with a PV of $36,111 to generate $1,675 of lifetime income for you and your wife. My financial calculator shows this result with a return of only 3% for a period of 35 years. I think I can do quite a bit better than that with very litttle risk, even after investment costs. What am I missing.

John

  

From Scott Burns:

The life annuity mentioned is an inflation adjusted annuity which means it will deliver substantially more cash over the probable 25 year period. A fixed life annuity with survivor income would be worth about $24,000. The Tribune, like many papers, is going through some tough times and syndicated features of cut in every economic cycles--- the cuts don't save much money but there is no blood on the floor. You can read the column on www.scottburns.com and we will soon have the entire archive loaded. You are in a position to be a very good financial planner--- you've got some income and can afford to allow your "book" and income to grow rather than burning a new territory each year.

Scott,

If you can stand on more question on delaying retirement benefits, how should I factor in an IRA that would provide the majority income while waiting for 70?

Or is it just a question of optimizing pension and SS payouts?

When I compare pension and SS payouts, waiting until 70 exceeds starting at 66 at age 79.

Add 4% of the age 66 IRA to the earlier start, versus 4% of the age 70 IRA, it takes until age 90 to pass the earlier start.

Thank you, Cal

  

From Scott Burns:

It's a question of optimizing and the math gets complicated because of tax rates, RMDs starting at 70, and the taxation of Social Security benefits.

One of the nice trade-offs is to use IRA money prior to age 70 as a substitute for Social Security benefits. This will:

1. reduce the IRA assets subject to RMDs, reducing future taxable income
2. increase Social Security benefits nicely and
3. possibly (but only possibly) reduce the amount of SS benefits subject to taxation because your RMDs will be smaller.

Social Security Benefits — Delayed Gratification

Scott:

In this article, you stated that your Social Security benefit of $1,995 a month at age 65 years and 6 months would rise to $2,623 a month if you deferred taking the benefit until you were 70 years old.

You further stated that your benefit would increase by $11.63 for each month of delay, etc.

Do these calculations assume that you will keep working and contributing to the Social Security fund (Social Security taxes)?

Is there any advantage in deferring Social Security benefits past your full retirement age if you stop working?

It is not clear from your article just what the assumptions are if deferring taking the Social Security benefit.

Thanks in advance for the further explanation.

Bob Singler

  

From Scott Burns:

The figures were obtained from a Social Security representative and may, or may not, have assumed future earnings. As I understand how the system works, your benefit is determined by taking your best 35 years of earnings so for someone who has generally earned at, or over, the wage base maximum, the result of working or not working would be about the same.

This may NOT be the case for many other people who would have their benefits recalculated for each additional year of work. As a result they would receive increases from three different sources:

1. Improvement in the wage record used to calculate their benefit.
2. An actuarial increase that would reflect taking benefits at a later age. This runs 7 to 8 percent, depending on your year of birth.
3. Inflation adjustments for each year

As a practical matter, the actuarial increase and the inflation increase are likely to dwarf any increase from recalculating a work record for all but the lowest wage worker.

Scott,

I read your article in USAA Magazine entitled "Delayed Gratification." I am repectfully taking issue with your conclusions. I must confess I don't understand your annuity argument. But I have run the numbers on the attached spreadsheet using actual SS Statement numbers and extrapolating thru age 90. I think you can say the following given the assumption that the person electing early retirement will invest those funds in a conservative (5%) vehicle. (I think this a fair assumption since there would be no decision to be made to receive SS early or not if a person is in need of the cash.) It is true that there are cumulative differences, $52,644 between retiring at 65 vs 62 and $93,180 between retiring at 70 vs 62. However, the cumulative effect of the first 4 years investment almost equals the entire amount of benefits one would receive retiring at 70, more than making up for the cumulative differences between the three retirement ages.

  

From Scott Burns:

Thanks for your note and spreadsheet. I have attached a PDF file for a brief from the Center for Retirement Research at Boston College that examines the optimal time for taking benefits. I think if you read it you'll understand the annuity/actuarial angle. The paper was done by economist Alicia Munnell, who heads the Center. I've interviewed Alicia since I started writing a column in the late 70's and she is a primo researcher. Economist Larry Kotlikoff, my coauthor in "The Coming Generational Storm" has come to the same conclusion--- that delaying SS benefits is a better bet than the investment alternatives.

Your spreadsheet is interesting but incomplete. It assumes, first, that the SS benefits taken early can be saved and invested without paying any taxes. While Social Security benefits are tax-free for those with modest incomes, the other income you would need to have to be able to save SS benefits would trigger the taxation of benefits and reduce the amount you could save each year, regardless of return. More important, your breakeven periods are ages 77 for deferring benefits to age 66 and 80 for deferring benefits to age 70. The life expectancy of for all U.S. residents at age 62 is 20.4 years according to the U.S. Life Tables, 2002, published by the CDC. So, on average, everyone in the U.S. will live at least 2.4 years beyond the longest breakeven period you have calculated. Women, of course, are expected to live longer and the joint life expectancy of a couple in their early 60s is about 24 years.

The interest income/growth assumption is only useful if you are assuming that the early retiree has no intention of every spending the money and will live for a long time. The higher the rate of return, the greater the amount retained in the persons estate. But that isn't the question being asked. The question being asked is about maximizing lifetime consumption. When it shifts from accumulating over all time periods to accumulating for some periods and then spending the remainder, interest accumulation is greatly diminished.

To have the figures come out in favor of taking benefits early you have to do two things. First, you need to make sure you can avoid taxation of benefits. Not easy. Second, you have to assume a rate of return that requires taking significant risk. Some people, in some time periods, would achieve those high returns. Others would not. Dealing with deferral periods no longer than 8 years and banking on high returns means taking a level of risk that most people should not take.

That's why the academic researchers base their observations on annuity comparisons.

[...] I’m still catching up on some reading - in this case the 2006 winter edition of USAA’s magazine. Scott Burns, a syndicated personal finance writer has an article about why he’s going to delay his social security benefits. [...]

I am a Financial Advisor in Worcester ,MA and I have rec'd a few call from clients who read an article that you wrote concerning Social Security. Could you forward the text to me or tell me where I can go to find it. The calls indicate one,that in general people donot understand when to take S.S. payments ,two, you may want to run a seris on the subject to indicate the issues involved.

From Scott Burns:

As you can see from the 70 comments, it has brought a good deal of reader attention. You'll get a better idea of the academic research behind it if you download the PDF for the Center for Retirement Research paper that examines the issue---- the URL is at the bottom of the column on the website.

This is a really tough idea for people to get their heads around. Many have argued that, no matter what, they simply won't live long enough. They can't believe that there is a better than 50 percent chance that they will live more than 14 years. Others want to assume heroic rates of return will justify taking the money today and investing it. But this is dead wrong. First, it ignores the possible taxation of Social Security benefits--- many of the people in a position to defer benefits will also be people who are paying taxes on a portion of their benefits. Second, it ignores the reality of the SS increase--- a real rate of 7 to 8 percent per year of deferral, depending on your year of birth. As a practical matter, anyone anticipating retirement in a few years will probably be entitled to 8 percent per year of deferral. There is NO investment that, short term, offers a certain return of 8 percent plus inflation other than the deferral of Social Security benefits.

I found your article very interesting, and appreciate being provided a new way to look at Social Security.

As a single male, I ran my own numbers and found that delaying Social Security benefits up to the age of 68 came out ahead of a single-life inflation-adjusted annuity.

I have expanded on your idea to see how it applies to single people, and have an article on my blog (link provided with this comment).  The article has a table which compares annuities Vs delayed Social Security at different ages and for different sexes and marital status.

In my article I also discuss some other factors for married people which may provide different results for other married couples:

(1) I conclude that for a married couple in which the wife's benefit from her own earnings is less than her spousal benefit, that the advantage for the husband delaying Social Security disappears quickly once the wife reaches her Normal Retirement Age since spousal benefits do not increase past that.

(2) When comparing a joint and survivor life annuity, you need to consider that the survivor's benefit is much less than 100%, since in Social Security the wife's check stops when she starts collecting her husband's check as a widow's benefit.

Thanks again for pointing this out.

By Scott Burns and Laurence J. Kotlikoff The patient suffered a cardiac arrest. A dangerous amount of