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A good strategy for increasing future retirement income

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The most difficult idea to communicate in personal finance is the advantage of delaying Social Security benefits. I’ve written about it for years and years. Every time, more than a few readers push back and say I’m crazy. The arguments vary, but here is an incomplete list:

• My spreadsheet (attached) says different; check this for the truth.

• There is no chance any of us will live to 70, let alone long enough to break even.

• A margarita today is way better than two margaritas sometime in the future.

• I’ve been sending the government money long enough. I want some back now.

• You are so silly. Everyone knows Social Security won’t exist in a few years.

So I’m going to give up with my own explanations. Instead, I’m going to fall back on Richard LaVoice, an executive vice president at the Symetra Life Insurance Co. and how he explains the opportunity.

“Social Security is even more valuable in a low [interest rate] environment. It’s gotten less attention than it deserves. But it’s a large component of any financial plan,” LaVoice said in a recent interview. Here’s the case he makes:

The first reality is that most people live longer than they expect. A 65-year-old couple has an 88 percent chance that one of them will live to age 80; a 73 percent chance one will live to age 85; and a 49 percent chance one will live to age 90. So they will be collecting benefits for a long time.

The second reality is that in spite of rapid benefit growth for delay, most people take benefits early. Few take them late. The average age for starting benefits, LaVoice notes, is 63.8 years. Women draw benefits ASAP — 49 percent start at age 62. And only 0.6 percent of men wait until age 70.

To bridge the years between 62 and 70, LaVoice suggests using a term annuity with inflation adjustment instead of taking benefits. Using Social Security estimates of inflation, he calculates that taking a typical $1,035-a-month benefit at age 62 will grow 2.5 percent a year to $1,264 by age 70. But if taking the benefit is delayed, it will be twice as much by age 70, a handsome $2,523 a month. That’s a gain of $1,259 a month for waiting.

You can cover the eight years of uncollected benefits with a term annuity. This is an insurance contract that provides monthly payments for a specific period of time. In this case, LaVoice suggests an eight-year term annuity from age 62 to 70. The annuity would have an initial monthly payment of $1,035 that will rise by 2.5 percent a year, just like the Social Security benefit is estimated to increase. The cost, at recent annuity prices: a one-time payment of $100,181.

Add the monthly payments, and you discover that you’ll have your purchase price back in about six years and six months. If the annuity is purchased with non-qualified money (cash that is not in a tax-deferred vehicle), LaVoice estimates that 92 percent of every dollar will be tax-free return of principal.

The payoff at 70 is doubled Social Security benefits. At the end of the annuity, you start taking Social Security benefits of $2,523 a month. That’s double the $1,264 a month you would have if you started benefits at age 62. The entire amount will be inflation-adjusted as long as you or your spouse lives.

Basically, you have doubled your Social Security benefits at age 70 with a one-time investment of $100,000. According to the website ImmediateAnnuities.com, a joint and survivor life annuity that is not inflation-adjusted would cost $230,586 to provide the same income. Adding inflation adjustment generally adds about 40 percent to the cost of a life annuity, so the apples-to-apples comparison cost would be about $322,000.

To put that in some perspective, my calculator tells me that the $100,181 premium would have to grow at a compound annual rate of 15.7 percent to reach $322,000 in eight years. Instead, you got your money back in less than seven years and doubled your Social Security benefits as long as you live.

The bottom line here is simple: If you are healthy and in your early 60s, thinking about retiring soon, and wanting to assure future income, the delay-Social Security strategy is the step to take before considering any other options to increase future income.

Questions about personal finance and investments may be sent by email to scott@scottburns.com.


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