(By Nilus) It's a given. Whenever I discuss Social Security, I get A LOT
of feedback from readers. And last week's article about the advantages of delaying payments was no different.
Some folks argued with my logic. Others said they simply didn't understand the math. So today I want to give you some more thoughts and explanations on the strategy, along with an additional Social Security strategy to consider.
Here's Another Way to Look At My Original Argument …
The general premise of my argument last week was that — depending on your personal situation and your overall prospects for a long life — it might make sense to delay taking Social Security payments for a while.
Now, as I pointed out last week, if you need the income right now … then just start collecting your Social Security checks as soon as you can and enjoy the rest of your life. You will do just fine.
The same is true if you're not looking to take any risk at all, and you believe that a bird in the hand is worth two in the bush.
However, if you're looking to get the most overall money back out of the system, read on.
As one person wrote in to say, you can use annuities to demonstrate my original point.
Annuities are basically life insurance policies in reverse. In their simplest form, you pay money upfront and then start collecting monthly fixed payments for as long as you live.
Die early, and you "lose." Live for a long time, and you may make more than you paid upfront.
The same basic principle is at work when it comes to delaying your Social Security benefits — a point that was recently made in this research brief from Boston College's Center for Retirement Research.
If anything, as the aforementioned article outlines, Social Security differs from the typical private fixed annuity because it is based on a much less aggressive actuarial table.
And while I had a lot of feedback on the issue of future inflation and the overall "time value" of the money you receive from Social Security, let's remember that Social Security does contain an inflation adjustment — as flawed as that adjustment may be. This is something that many private annuities don't have.
So here's an example of how this works in the real world:
Scenario #1. You are able to collect $12,000 a year from Social Security at age 65.
Scenario #2. You wait an extra year and start collecting $12,680.
Just for delaying 12 months, you will now earn an extra $680 annually for the rest of your life. And your "cost" for doing so was $12,000.
To arrive at your annual interest rate, or "return on investment," you simply divide the $680 annual payment by the initial $12,000 you "spent."
What you'll come up with is an annual rate of 7.1%!
And this is just the simple analysis. There are additional reasons to favor Social Security over a regular annuity.
First, if you worked during that extra year of delaying, it's quite possible you would have FURTHER increased your future payments because your earnings record would have also gone up.
Second, these "annuity" payments get favorable tax treatment, and it's entirely possible you would get further tax benefits by delaying that extra year.
Third, Social Security's built-in survivor benefit might also make delaying for the additional income all the more attractive to couples.
Look, I know there are a lot of "ifs" involved. So yes it's a gamble. But my point is simply that from a mathematical standpoint, it might make sense to delay if you can — especially given today's ultra-low interest rates from other investment options.
Meanwhile, Couples Can Take Additional Steps
To Make Social Security Work in Their Favor …
For example, you and a spouse might consider the "file and suspend" approach. This is an especially popular technique when one spouse has earned far more than the other.
In a nutshell, here's how it works:
Let's use a couple named Harry and Mary. Harry is eligible for a $2,000-a-month benefit at age 66 while Mary's own benefit at age 66 is worth $800.
Harry can file for Social Security and then immediately suspend his benefits. Despite that, Mary can still file for HER spousal benefit based on Harry's earnings.
That means she now gets $1,000 a month instead of the $800 that she would have gotten based on her own work history.
Meanwhile, Harry has still effectively delayed his own benefits. And if he waits until 70 he will start collecting $2,640 a month instead of the $2,000.
What's more, Mary would step up to that higher amount if Harry died after age 70 because the spousal death benefit is 100% of HIS payments.
As usual, there are some risks — namely, that Harry might die before he gets to claim the higher benefit. But if he's in reasonably good health, that's a minimal risk.
Also remember that when you file and suspend you can reinstate your benefit payments at any time. You DO NOT have to wait until age 70 to resume getting your checks if you suddenly realize you need them.
For more details on this particular strategy, check out this page on the Social Security program's website.
And please realize that we've still just scratched the surface of what's possible when you really dig into the various retirement options and strategies available.
So I encourage you to go out there are read up on these topics further. It could mean all the difference to your wealth and happiness.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.