Why should you defer your benefits
By John Rafferty
According to an article on the CNBC website, Social Security will only be able to pay 80% of benefits after 2035 if nothing is done to strengthen the program. This notion of future benefit reductions has been circulating for years and may force many people to decide to take what they can while they can – perhaps as early as age 62, before any reductions.
However, it may be justified both to pursue a delay and perhaps to purchase enough private annuity income to meet any future reduction in benefits. But first, a review of the basic mathematical appeal of deferral, assuming there is no reduction in benefits.
Want a 10% return, guaranteed? Delay your Social Security benefits.
By simply choosing to defer retirement benefits from age 62 to age 70, one can benefit from a guaranteed cash flow for life (and for the surviving spouse) and doubled in nominal value. The difference between the nominal annualized cash flows from age 70 versus age 62 equals a compound annualized growth rate of 10%. That’s a return that can be hard to beat for the stock and bond markets, so delaying Social Security can be an effective — and guaranteed — way to boost your future earnings.
How much higher is Social Security at 70 than at 62?
The answer: it depends on the metric you choose. Do you want to compare the difference between current 2022 dollars or inflated future dollars (also called nominal dollars)? Here’s an example using the Social Security Administration’s online quick calculator:
This calculator asks the user to select either future benefits in current 2022 dollars or inflated future dollars. In our example below, both have been chosen.
A retiree stops working in 2021, having earned $200,000 that year. They will turn 62 in June 2022 and have a large retirement portfolio from savings and investments over their just-ended careers. According to the Quick Calculator, if they start getting the benefits:
- In June 2022, at age 62, they will receive $2,269 per month.
- In June 2030, at age 70, they will harvest:
- $4,901 per month (in future 2030 dollars)
- $3,996 per month (in today’s 2022 dollars)
While waiting to receive benefits until age 70, their monthly benefit has increased by 115%, or about 10.1% compounded, per year, over eight years if we use future 2030 dollars (which will buy naturally less than today’s 2022 dollars). If we instead use inflation-adjusted dollars intended to convey the value of those dollars in terms of 2022 purchasing power, the projected payment for 2030 will be $3,996 per month. This amount is 76% higher than the amount at age 62 and equates to an inflation-adjusted compound annualized growth rate of the benefit amount of approximately 7.3% per year over these eight years of service. waiting before perceiving.
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What happens if benefits are reduced in time to be collected at age 70? Was the delay still worth it?
Assume that benefits are reduced by 20% at age 70, using the examples above. They decided to waive the $2,269 per month that could have been collected at age 62 and waived all benefits for eight years. They did this because they expected to receive $4,901 per month at age 70.
Instead, benefits are now reduced just in time to reach age 70 and collect.
- In June 2022, at age 62, $2,269 will be collected per month.
- In June 2030, at age 70, at 80% of the expected benefits, we would receive:
- $3,921 per month (in future 2030 dollars)
- $3,197 per month (in today’s 2022 dollars)
Now, after the reduction but still waiting to receive benefits until age 70, the monthly benefit has increased by 73% instead of 115%, or about 7.1% compounded per year, over eight years in future 2030 dollars. If instead inflation-adjusted dollars (intended to convey the value of those dollars in terms of 2022 purchasing power) are used, the projected payment for 2030 will be $3,197 per month, which is 41% higher than the amount at age 62 and equates to an amount compounded with the annualized growth rate of the benefit amount of approximately 4.4% per year over these eight years of waiting.
Yes, these are certainly reductions, but the advantages of deferral remain compelling for those who are well placed to benefit from them. Where else can you get the equivalent of guaranteed nominal future cash flow growth of 7.1% per year?
Before concluding with who might be best positioned to benefit from a delay strategy, let’s consider how one might want to purchase their own private solution to fill the projected cash gap left by a 20% cut. We’ll use our example above, where the expected nominal monthly cash flow at age 70 was supposed to be $4,901 but has been reduced to $3,921. That’s a reduction of $980 per month, or $11,760 per year.
How much does it cost to produce $11,760 annually, guaranteed for life, starting at age 70?
A 62-year-old can purchase a fixed indexed annuity with guaranteed lifetime withdrawal as a solution to hedge against the possibility of future benefits being reduced. In the example here, the person wants to secure the right to withdraw at least $11,760 per year starting at age 70. (Since this cash flow will remain static, one might want to buy more to compensate for future inflation.)
The most competitive contracts today will produce lifetime cash flow covering a lifetime, starting at age 70 and using lifetime annual withdrawals of approximately 9-10% of the purchase amount at age 62. This means that the annuity purchase needed to produce $11,760 per year covering a single life at age 70 is between $120,000 and $130,000.
It’s a modest price to pay for those who can afford to delay their Social Security benefits, and it’s also just a backup plan. If benefits are not reduced, the value of the annuity at that time can be reallocated to other uses if that makes more sense.
Who can benefit from the social security deferral?
Those who have significant financial resources and can afford to fund their own retirement until age 70 can also afford to delay the start of benefits until age 70. Health status and family history also play a role in the decision to defer benefits until age 70. For example, if a single person or at least one member of a couple is in excellent health and has a history of family longevity, they will be more likely to enjoy these larger payments for longer and possibly benefit from a higher total income from Social Security benefits than if she started at age 62.
Typically, the “break-even” age, or the age at which total accumulated Social Security payments began at age 70 would exceed those begun at age 62, is at or near average life expectancy. , which makes sense since there is a high degree of actuarial science. neutrality in the calculation of benefits. In other words, the Social Security Administration has no preference or financial interest in when one begins to receive benefits.
For those who can afford to delay Social Security benefits and for whom it makes the most sense in terms of health, longevity and inheritance, it will be hard to beat the magnitude of cash flow that such a delay can produce, using traditional asset accumulation. approaches. This remains true even if future benefits are reduced. Purchasing an annuity to make up for the anticipated reduction in future benefits can also be a cost-effective way to ensure future guaranteed cash flows are at desired levels.
About the Author: John Rafferty
John Rafferty has spent much of his 30-year career building annuity marketing departments at MassMutual, AIG/American General and Symetra. He holds a BA in Economics from Colby College and an MA in Public Policy from Trinity College, and currently operates an annuity sales and marketing consultancy, RaffertyAnnuityFraming.com.
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