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Social Security "Withdrawal of Application" Strategy Ends --
But You Can Still buy a Cheap Annuity on the Installment Plan


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This article was first posted on March 1, 2011.

[Retire Early]

The Social Security Answer Book



Back in January, Retire Early noted that you can still "buy" the additional inflation-adjusted monthly benefit that the now defunct Withdrawal of Application strategy provided at age 70 by simply delaying your first Social Security check until then. Think of it as "buying an annuity on the installment plan." It would still be much cheaper than taking Social Security at age 62, and then buying an annuity in the private market at age 70 to make up the difference in your monthly benefit. To illustrate this, let's look at a retiree eligible for the maximum monthly Social Security benefit who turned 70 in January 2011 and started taking Social Security when he turned 62 in January 2003.

The table below illustrates this result for a 62-year-old (born in 1941) who retired in 2000 with the maximum benefit. It's interesting to note that "buying" an annuity from the Social Security Administration costs a 70-year-old female 39% less than purchasing the same benefit from a private insurer (e.g. Principal Life).

Take Social Security Benefits From Age 62 to Age 69, Cumulative After-Tax Value at Age 70
Social Security Benefits ----- Save & Invest the SS Benefits
Year Age COLA Monthly
Benefit
Annual
Benefit
Amount of
SS Benefit
subject to tax
85.00%
Tax Paid at
25.00%
tax rate
After tax
Amount
Invested
----- Jan 01 Bal After-tax
Deposit
Earnings
@ 2.00%
Tax on
Earnings
@ 25.00%
Dec 31 Bal
2003 62 1.40% $1,412 $16,944 $14,402 $3,601 $13,343 ----- $0 $13,343 $200 -$50 $13,494
2004 63 2.10% $1,442 $17,300 $14,705 $3,676 $13,624 ----- $13,494 $13,624 $474 -$119 $27,473
2005 64 2.70% $1,481 $17,767 $15,102 $3,775 $13,991 ----- $27,474 $13.991 $759 -$190 $42,034
2006 65 4.10% $1,541 $18,495 $15,721 $3,930 $14,565 ----- $42,034 $14,565 $1,059 -$265 $57,393
2007 66 3.30% $1,592 $19,106 $16,240 $4,060 $15,046 ----- $57,393 $15,046 $1,374 -$343 $73,469
2008 67 2.30% $1,629 $19,545 $16,613 $4,153 $15,392 ----- $73,469 $15,392 $1,700 -$425 $90,136
2009 68 5.80% $1,723 $20,679 $17,577 $4,394 $16,285 ----- $90,136 $16,285 $2,047 -$512 $107,956
2010 69 0.00% $1,723 $20,679 $17,577 $4,394 $16,285 ----- $107,956 $16,285 $2,403 -$601 $126,043
Total SS benefits $150,514 . $31,984 . ----- Total Earnings $10,017 $2,504 .
Federal Taxes Paid -$31,984 . . . ----- Tax @ 25% -$2,504 . .
After-tax Interest Earned $7,513 . . . ----- After-Tax Total $7,513 . .
Net Value of SS Benefit $126,043 . . . ----- . . . .
.
Monthly Social Security
Benefit @ Age 70
$2,978 . . . ----- . . . .
Increase in Monthly SS Benefit
($2,978 - $1,723) =
$1,255 . . . ----- . . . .
.
Cost of inflation-adjusted life
annuity @ age 70 with a $1,255/month benefit =
$178,442 for Male $206,578 for Female ----- . . . .
.
Savings: Soc. Security @ age 70 vs. life annuity = $52,399 for Male $80,535 for Female ----- . . . .

If you want to run your own numbers, you can download a copy of the Excel spreadsheet, click here. (file size= 30 KB)

The affect of taking Social Security early, at age 62, or delaying benefits until age 70

The Social Security Administration publishes a handy table that summarizes how your monthly benefit is affected by the age you start collecting benefits. For the retiree born in 1941 in our example, starting Social Security benefits at age 62 results in a monthly benefit that's just 76-2/3% of what he'd receive at his full retirement age of 65 years, 8 months. Delaying benefits until age 70 results in a monthly benefit that is 32-1/2% larger. In other words, delaying benefits from age 62 to age 70 results in a monthly Social Security check that's 132.5/76.67 = 72.4% larger.

What are the risks of waiting?

Political Risk: No one knows what changes Congress and The President might make to Social Security. Despite the considerable financial benefit of waiting, this leads many people to take it early, at age 62, on the theory that any changes will mean they'll get less in the future.

Mortality Risk: The Social Security Administration's own Mortality Table predicts that 14% of 62-year-old men and almost 10% of the women will be dead by age 70. Clearly waiting until age 70 to collect your benefits is the wrong decison for these hapless retirees. Many analysts put the break-even point for delaying Social Security from age 62 to age 70 at somewhere around age 79 (i.e., a retiree waiting until age 70 to start benefits must live to at least age 79 before he collects as much money as a retiree who started at age 62 with a lower benefit.) About 41% of 62-year-old men and 30% of the females won't live that long. If you want to get an estimate of your own life expectancy, the University of Pennsylvania has an easy to use calcuator on their web site. You'll also find links to a number of other longevity calculators in this article.

Calculating the Breakeven Point (Age) for delaying Social Security benefits

The breakeven point (age) depends on the investment returns for the retirement portfolio you will deplete in lieu of taking Social Security at age 62. Two examples are presented below; one for a 2% nominal investment return and the second for a 10% return. Three scenarios are examined 1) Take Social Security at age 62, 2) Wait until age 70 to start Social Security benefits, and 3) Take Social Security at age 62, and then buy a life annuity from a private insurer at age 70 to make up the difference in benefits.

[Breakeven at 2%]

[Breakeven at 10%]



What to conclude from these results?

Because a retiree will only see 8 years of compounded returns from age 62 to age 70, the rate of return doesn't have a big effect on the break-even age. Moving from a 2% nominal investment return to a 10% return only increased the breakeven age two years, from 78 to 80. The worst alternative was taking benefits at age 62 and then buying an annuity from a private insurer at age 70 to make up the difference in the monthly benefit which added another 2 or 3 years to the breakeven age. If there is any chance that you might purchase an annuity to supplement your retirement income, the least expensive way to "buy" that benefit is to delay your Social Security until age 70.


Links for additional information

www.analyzenow.com -- Ask Bud Hebeler when to take Social Security Benefits? 01/04/2004
http://www.analyzenow.com/Ask%20Bud/Ask%20Bud%20Response/Ask_Bud_when_to_start_social_security_11_3_06.htm

Andrew Tobias column of 04/11/2006
http://www.andrewtobias.com/newcolumns/060411.html

Vanguard Group - Social Security: Does it pay to delay? 07/23/2007
http://www.vanguard.com/VGApp/hnw/VanguardViewsArticle?ArticleJSP=/freshness/News_and_Views/news_ALL_socialsecurity_07232007_ALL.jsp&SYND=RSS&Channel=AN

Morningstar Conversation #55481 -- The "risk" of waiting to take Social Security 12/18/2006
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=189849&minReplySeq=1#replyTop

Morningstar Conversation #45213 -- OT When to take Social Security? 11/14/2005
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=159663&minReplySeq=1#replyTop

Morningstar Conversation #32377 -- When to take Social Security Benefits? 01/04/2004
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&lastConvSeq=32377

Charles Schwab -- When should you take Social Security? 02/21/2007
http://www.schwab.com/public/schwab/research_strategies/market_insight/retirement_strategies/planning/when_should_you_take_social_security.html?refid=P-1880644&refpid=P-1880905

CS Monitor -- When does it pay to take Social Security benefits early? 06/04/2007
http://www.csmonitor.com/2007/0604/p13s01-wmgn.html?page=1

CNN Money -- When taking Social Security benefits early is a mistake 06/06/2007
http://money.cnn.com/2007/06/06/pf/retirement/social_security_early/index.htm


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