Do I have your attention?
The opportunity is very simple. You don't have to make bets on the economy, future corporate earnings, or the direction of the yen, euro, or renminbi. Nor do you need insight into the direction of natural gas prices or interest rates. Just defer taking your Social Security benefits.
Each month of deferral will increase your benefits by a small amount. But the increases add up. And there isn't an investment anywhere in the world that will deliver as high a "return" with no risk.
Needless to say, this option isn't available to everyone. Many men take their benefits early because they simply don't have a choice. They need the cash. According to research by economist Alicia Munnell, more than half of all men take Social Security benefits at age 62. By age 65, when everyone is eligible for Medicare, nearly 80 percent of all men are already taking Social Security benefits.
But I intend to defer them, probably to age 68 or 69.
You'll see why when you see the figures that were supplied to me by a representative at my local Social Security Administration office. You'll also see how deferring benefits creates more income than taking them.
My Social Security representative told me that I had become eligible for $1,995 a month in benefits last May. That's when I reached my full retirement age--- 65 years and 6 months for those born in 1940. The benefit, she explained, would rise to $2,623 a month (plus adjustments for inflation) by the time I was 70 years old, a period of 54 months. That meant my benefit would increase by $11.63 for each month of delay. Over the course of a year, the monthly benefit would increase by $139.56.
It would take over 14 years for the increase in benefits to "catch up" on any foregone benefits.
Because of those 14 years, many people decide to take the money and run. They'd rather have money now than later.
In fact, they would be better off taking money from their taxable savings or IRA accounts and deferring the benefits.
You can understand why by going through a simple example with me. Suppose I defer taking my benefits for only 12 months. That means I will give up $23,940 in benefits. To make up for the lost income, I will need to (a) work or (b) take money from my investments.
At the end of that time, however, my monthly benefit will have increased by $139.56 a month or $1,675 a year.
Query: How much would it cost to "buy" that additional income in a private annuity? To find out, I had to price the cost of a joint and survivor life annuity with a guaranteed inflation adjustment. Inflation-adjusted life annuities are rare, but they are offered by Vanguard. You can get quotes on their website.
To get that monthly income, with inflation adjustments, guaranteed to last as long as either my wife or I am alive, I'd have to plunk down $36,111.
In other words, taking $23,940 from one of my qualified (tax deferred) accounts over the next 12 months will do the work of investing $36,111 next year.
Is that a deal or is that a deal?
But what about those 14 years of catching up? What if we get hit by a bus?
Well, it's possible. None of us knows how long we will live. All we can do is play the odds. Those odds say that either my wife or I will live to collect life annuity income for 25.9 years--- nearly twice the 14-year payback period.
On the web:
Alicia Munnell and Mauricio Soto, "Why Do Women Take Social Security Benefits So Early?"
Quotes for fixed life annuities
Quotes for inflation adjusted life annuities
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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