This is the first article in a two-part series addressing Social Security benefits. The second article is scheduled for publication July 27.
Retirees are entitled to the option of collecting benefits as early as age 62, according to the U.S. Social Security Administration. The monthly benefit is much higher, however, if beneficiaries delay collecting benefits until age 70. But how much more?
According to Elaine Floyd of Horsesmouth LLC, a financial consulting company, if you were to spend all the benefits you collect – without investing – the break-even point would occur at age 78. In other words, if you live beyond age 78, you would collect more in your lifetime by delaying Social Security payments than by collecting early. Even if you spent half the benefits received and invested the remainder at an 8 percent average annual return, you would still come out ahead if you live beyond age 81.
But there’s a more valuable way to analyze these benefits beyond a break-even gamble against your death. Social Security is the only lifetime-guaranteed payment that provides true longevity protection by adjusting for actual inflation every year.
Neither company pensions nor annuities do this, nor do any of the commonly considered safe investments such as CDs or money-market mutual funds. Some public pensions offer a yearly inflation adjustment, but it’s usually capped at a very small amount, typically less than the actual rate. What makes this protection so valuable is the deleterious effect that inflation has on purchasing power.
Although it’s difficult to imagine inflation being a problem right now, it has averaged nearly 3 percent each year during the past 80 years and climbed to 16 percent in the 1980s.
Consider this: If you kept $100,000 in a noninterest checking account during a 24-year period with an average annual inflation rate of 3 percent, you’d still have $100,000 at the end of that time, but it would be worth only $50,000 in buying power. And that’s with a low average inflation rate.
Imagine how much worse the impact would be if the deficit spending in the United States during the past three years ramped inflation to double digits again. With retirement lifetimes stretching well beyond 24 years on the increase, inflation has become the biggest risk to outliving one’s money.
Unless you have an urgent need for money, most financial planners now advise clients to wait until 70 before collecting Social Security benefits. It doesn’t sound like a very complicated decision. It does get more complicated, however, when adding the possibility of collecting spousal benefits if you are married, divorced or widowed.
The concept is simple: A spouse is entitled to collect either his/her own benefits or half the benefits of the other spouse, whichever is greater. By knowing the rules and carefully planning when to file for benefits, knowing which of the two benefits to choose and when to change them, you can significantly increase the amount you collect over your combined lifetimes.
That is the subject of next month’s column.