Mary Beth Franklin

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Mary Beth Franklin on what your clients really want when they talk about retirement.

Rate-of-return analysis shows value of delaying Social Security

Higher-earning spouse should maximize benefits

Feb 25, 2014 @ 11:07 am

By Mary Beth Franklin

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For years, I have been telling my readers of the value of delaying Social Security benefits as long as possible — particularly for married couples when the older, higher-earning spouse maxes out his or her benefits.

Now, new research from a respected actuary puts a price tag on the value of delaying benefits by providing an internal-rate-of-return analysis.

Individuals can choose to begin Social Security benefits at any age between 62 and 70. Currently, the normal retirement age to receive full benefits is 66 and applies to those born from 1943 through 1954. The benefits of those claiming at 62 is 75% of the age-66 benefit, and the age-70 benefit is 132% of the full retirement age amount — thanks to four years' worth of delayed retirement credits worth 8% per year.

Joe Tomlinson, an actuary and managing director of Tomlinson Financial Planning in Greenville, Maine, developed his own mortality estimates for advisory clients who are typically more upscale and healthier than the general population. He estimates a 62-year-old man today has a 24-year life expectancy to 86 and a 62-year-old woman is likely to live 27 years to 89. Both figures are about three years longer than the life expectancy that the Social Security Administration provides. For a typical married couple, he estimates the surviving spouse would live 30 years until age 92.

To examine the value of delaying Social Security retirement benefits from 62 to 70, Mr. Tomlinson calculated real rates of return for males and females using these customized mortality estimates and the real risk-free yield of 10-year Treasury inflation-protected securities, which was 0.62% as of January 2014. Then he calculated the comparative real return of delaying Social Security benefits from 62 to 70. His results were: 3.58% for men, 4.57% for women and 5.24% for the last spouse to die.

“The basic message for healthy individuals (and for couples with at least one healthy member) is that delaying is good and longer delays — up to age 70 — are better,” Mr. Tomlinson noted in a recent article “Providing Better Social Security Advice for Clients” published in Advisor Perspectives.

He took the words right out of my mouth!

The promise of a risk-free, guaranteed 8% per year increase in Social Security benefits from 66 to 70 is a smoking hot deal given today's low-interest-rate environment. Mr. Tomlinson provides some interesting insights of how this situation evolved.

“The government's original intent was to provide actuarially fair adjustments, but it has been many years since these factors were updated for changes in interest rates of mortality,” he wrote. Since 1950, male and female mortality has increased by six years and interest rates that were typically 2% to 3% are now below 1%.

“The mortality improvements and lower interest rates have turned adjustments that used to be actuarially fair into strong incentives to delay Social Security benefits,” Mr. Tomlinson said.

Despite the evidence of the value of delaying Social Security benefits, the majority of retirees still claim benefits before their full retirement age. Mr. Tomlinson hopes financial advisers can reverse that trend.

“Clearly there is a need for advisers to do a better job helping clients with Social Security-claiming decisions,” he said, urging advisers to learn basic Social Security claiming rules and invest in Social Security optimizing software. His favorite is SocialSecurityAnalyzer.com.

“It requires an investment of adviser time and effort, but it's worth it for clients,” he said.

I wholeheartedly agree.

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