A Proposal to Fill Your Retirement Gap
David and Debra S. both had successful careers. In analyzing their retirement finances, the couple agreed that he should wait until age 70 to start his Social Security in order to get the largest monthly benefit.
But he wanted to sell his business at age 69 and retire then, so the North Carolina couple used their savings to cover some expenses over the next year.
Waiting until 70 – the latest claiming age under Social Security’s rules – accomplished two things. In addition to ensuring David gets the maximum benefit, waiting guaranteed that Debra, who retired a few years ago, at 62, would receive the maximum survivor benefit if David were to die first.
Other baby boomers might want to consider using this strategy. As this blog frequently reminds readers, each additional year that someone waits to sign up for Social Security adds an average 7 percent to 8 percent to their annual benefit – and these yearly increments spill over into the survivor benefit.
Delaying Social Security is “the best deal in town,” said Steve Sass at the Center for Retirement Research, in a report that proposes baby boomers use the strategy to improve their retirement finances.
Here’s the rationale. Say, an individual wants a larger benefit. Instead of collecting $12,000 a year at age 65, he can wait until 66, which would increase his Social Security income to $12,860 a year, adjusted for inflation, with the increase passed along to his wife after his death (if his benefit is larger than his working wife’s own benefit). The cost of that additional Social Security income is the $12,000 the couple would have to withdraw from savings to pay their expenses while they delayed for that one year.
Social Security is essentially an annuity with inflation protection – and the payments last as long as a retiree does. So the $12,000 cost of increasing his Social Security benefit can be compared with cost of purchasing an equivalent, inflation-indexed annuity in the private insurance market. An equivalent insurance company annuity for a 65-year-old man, which begins paying immediately and includes a survivor benefit, would cost about $13,500.
The bottom line: delaying Social Security is cheaper than buying an insurance annuity.
David and Debra’s strategy of delay would also help couples who are concerned they won’t be able to retire comfortably.
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