On Retirement

Delaying Social Security benefits 'best deal in town'

Paying out of pocket for one year may hurt, but it beats buying an annuity

May 24, 2012 @ 12:44 pm

By Mary Beth Franklin

By now, everyone should know that by delaying claiming Social Security benefits until an older age results in a bigger, inflation-adjusted monthly check for life. But a new study from the Center for Retirement Research at Boston College explains why delaying benefits offers the” best deal in town” in today's low-interest rate environment.

Social Security benefits can be claimed at any age between 62 and 70.The difference between claiming as early as possible at age 62 and waiting until age 70 to claim the maximum amount results in a benefit that is 76% larger. But to score higher benefits, many retirees must rely on their savings to pay their bills in the interim.

Author Steven Sass calculates the price of waiting in terms of buying additional monthly income through an annuity. Think of the savings used during the period before collecting Social Security benefits as the “price” and the increase in benefits as the annuity that a retiree can “buy” from Social Security.

For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66, or $860 more. If he delays claiming benefits for that one year and uses $12,860 from his savings to pay the bills for that 12 months, $12,860 is the “price” for the extra $860 in Social Security income. The annuity rate — the additional annuity income as a percent of the purchase price —would be 6.7% ($860/$12,860).

That rate is higher than the 5.1% annuity rate that a 65-year-old man would get if he purchased an inflation-protected income annuity from Vanguard, the author notes. And it is significantly higher than the 3.7% rate that the man and his 63-year-old wife would get if they bought a similar immediate annuity that would provide income as long as either spouse is alive. (One of the main reasons married couples should consider delaying Social Security benefits for the higher-earner is to lock in the largest possible survivor benefit for the remaining spouse).

Buying an annuity from Social Security is generally more attractive than buying a commercial annuity because the increased Social Security payments are actuarially fair with no additional cost to participants, Sass writes. Commercial annuities, on the other hand, have to factor in marketing, management and risk-bearing costs into their prices. Plus, Social Security benefit adjustments are based on the life expectancy of the average individual while individuals who buy commercial annuities tend to have above-average life expectancy and the cost of providing yearly income is priced accordingly

Buying an annuity from Social Security is particularly attractive in today's low-interest environment when you consider traditional alternatives for providing retirement income. Living off the interest from savings is virtually impossible today as interest rates on safe investments are currently less than inflation. Drawing income from a portfolio of stocks and bonds is also less attractive given the volatility of the stock markets and the low-interest rates on bonds, which could be further hurt by rising rates or increased inflation. And commercial annuities funded by bonds provide much less income today than they would in more normal times when interest rates are higher.

Back in February, I attended a conference in Washington focused on how to solve the nation's retirement deficit crisis. Representatives of big business and big labor, academics and consumer advocates, and key leaders from the Departments of Treasury and Labor, the Pension Benefit Guarantee Corporation and the Social Security Administration all gathered on Capitol Hill.

The consensus of the star-studded lineup was that for many Americans, the best use of their meager retirement nest eggs may be to use them as a bridge to fund the early years of retirement, allowing them to delay collecting Social Security benefits for as long as possible. Steve Goss, chief actuary of the Social Security Administration, extolled the value of delaying benefits until age 70 when they are worth a third more than at the normal retirement age of 66 as “a remarkable deal that is not well understood.”

Sass' new paper supports that statement. “Buying an annuity from Social Security, especially in today's low interest rate environment, is the best deal in town,” he writes. You can read his full report at http://crr.bc.edu/briefs/should-you-buy-an-annuity-from-social-security/ .

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