Publication: Investor's Notebook
A REAL LIFE CASE FOR DELAYING SOCIAL SECURITY BENEFITS | |
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Investor's Insight - October 3, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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A REAL LIFE CASE FOR DELAYING SOCIAL SECURITY BENEFITS
by Scott Burns
If you're male, healthy and married, you've got an
investment opportunity few will discuss with you. Over
the next 12 months the "investment" could provide an
effective return of 50 percent.
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.
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You'll see why when you see the figures that were supp-
lied to me by a representative at my local Social Security
Administration office. You'll also see how deferring ben-
efits creates more income than taking them.
My Social Security representative told me that I had be-
come 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 in-
come in a private annuity? To find out, I had to price the
cost of a joint and survivor life annuity with a guarant-
eed inflation adjustment. Inflation-adjusted life annuities
are rare, but they are offered by Vanguard. You can get
quotes on its Web site.
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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.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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