Treat Social Security as End-of-Life Insurance


First things first: let’s kill this notion that my fellow Generation Xers started spouting years ago about how Social Security benefits will not be around when they get to retirement age. It’s nonsense. I don’t factor Social Security into my retirement planning, but not because I expect those funds to be dried up (recipients will receive just 75 percent of their benefits starting in 2033 if the current fund erosion isn’t addressed).

I don’t factor Social Security into my retirement planning because I view the benefits as an insurance policy. That’s not some revolutionary idea, either. Social Security was established as a social insurance program in the 1930s after the 1929 stock market crash had essentially erased the savings of many senior citizens, dropping them into poverty. There have been various changes to the Social Security program over the last 80 years, leading to where we currently stand. The basics are a 6.2 percent tax rate for employees on income under $118,500 and inflation-adjusted benefits based on the last 35 years of salary.

The dollar amount of Social Security benefits is based on two factors: (1) your lifetime earnings and (2) the age at which you elect to start receiving benefits. For the latter, the earliest you can start receiving benefits is at 62 (at a reduced amount). Your benefits will gradually increase for each year after your full retirement age (66 if you were born before 1954; 67 after 1959) until you reach 70. The question as to when you should first elect to receive Social Security benefits has been a hot topic in recent years as Baby Boomers have flooded the retirement ranks. The lure of an early payout from the government on taxes that you paid throughout your working life is mighty tempting, although pushing the withdrawal button at 62 has serious consequences.

A 62-year-old man electing to receive Social Security benefits this year will only get 75 percent of his monthly benefit due to the additional 48 months of early withdrawals, according to the Social Security Administration’s website. His spouse’s benefit would be cut from 50 percent to 35 percent at 62. He would receive a full 100 percent of his monthly benefit by waiting until 66 and 132 percent of his benefit by waiting until age 70. In money terms, if the 62-year-old’s full retirement benefit was $1,000 a month, he would receive just $750 a month if he claimed benefits at 62 but would pull in $1,320 a month if he waited until 70.

The delay until 70 approach works out to about a 7-8 percent return over the eight years starting at 62, which has prompted unscrupulous financial advisors and overzealous investors to participate in a game of chasing returns by promoting early Social Security benefits withdrawals with hopes of beating the market. That’s fool’s gold, however; most economists are forecasting 7 percent nominal returns for the foreseeable future, which is not worth the risk of trading versus a guaranteed 7-8 percent return by delaying Social Security benefits.

The other angle that retirees play is based on longevity. The reasoning is simple enough. Why delay Social Security benefits for eight years if you are not around long enough to enjoy the full amount that you delayed? That breakeven point has been scrutinized exhaustively and the calculations point to 80½ as the age at which delaying to 70 becomes profitable for you. In other words, if you plan on dying before 80½, go ahead and take early Social Security benefits at 62. If you plan to live until you are 81 (or longer), you should wait until 70, if possible.

Critics of that simplification point to the U.S.’s current life expectancy of 78.8 years of age (81.2 for women; 76.4 for men). Those estimates include infant and teen mortality rates. A November 2014 CDC report indicated that a 65-year-old has a 49 percent chance of reaching 85 and a 28 percent chance of reaching 90. Given the current savings rate fiasco, most Americans are in serious jeopardy of running out of money in retirement long before they make it to 90. That’s why I consider Social Security benefits to be insurance of the end-of-life variety. By delaying your benefits until 70, you ensure the largest paycheck possible in your latter years, regardless of the size of your nest egg.

Unfortunately, a recent report from the Social Security Administration indicates that Americans are not following that advice. As of December 2013, nearly 28 million people receiving benefits – roughly 73 percent of all Americans on Social Security – had elected to take a reduced amount by claiming benefits before their full retirement age. In doing so, many Americans have added unnecessary risk to their final years of life.


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