SENIOR FINANCES
SPECIALIZING IN INVESTMENT MANAGEMENT AND ASSET PRESERVATION FOR MATURE INVESTORS JANUARY 2008
Waiting Longer to Collect Social Security Pays If You Live a Lot Longer!
information each year on what your projected PIA will be. The table shows that those born from 1943 to 1954 will only receive 75% of their PIA if they begin collecting at age 62. Beginning later, but before 66, produces increasing percentages. Waiting until 66 will give them their full PIA. To delay collecting until after their FRA (i.e. 66) will increase their PIA by 8% per year. However, there are no more credit increases for delaying beyond 70 years of age! For reference purposes, the FRA for those born in 1942 is 65 years and 10 months. Their fraction for beginning collecting at 62 is slightly greater, but their incentive to delay beyond FRA is less. Those born after 1954 show a reverse dependence except that their incentive to delay beyond FRA remains at 8%.
Birth year Year turn 62 FRA Year/month Age 62 benefit (% of PIA) 1942 2004 65/10 75.8% 1943-54 2005-16 66/0 75.0% 8.0%
You
want to maximize Social Security’s
contribution1 to your retirement. You can file to begin receiving your Social Security benefits anytime from age 62 to 70. The earlier you begin collecting, the smaller annual amount you will receive--it stays that way. Let’s see how it works so you can decide what to do. The Social Security system was designed to assure some income for retirees. Originally, the system was geared to receiving full benefits–known as the primary insurance amount (PIA)--at 65 years-known as the full retirement age (FRA). You could begin collecting as early as 62, but with reduced benefits which was about 80% of your PIA. That fraction would never change from then on. To try to keep the social security system solvent, the government is increasing the FRA from 65 (for those born before 1938) to 67 (for those born after 1959). In 2007 those of you who were born from 1942 to 1954 now range in age from 53 to 64. Your FRA is 66. So pay close attention because most of you will turn (a few already have) 62 years old from 2007 to 2016. The PIA that you would get at FRA depends on your income history. Social Security sends you
1 Information for this article comes from www.socialsecurity.gov also has a wealth of information.
Credit for each year delay 7.5% after FRA to 70 (% of PIA)
IRS
Pub
915.
With this understanding of how Social Security benefits are paid out, you can begin to consider if it is worth waiting until your FRA or beyond for a larger yearly payout; or should you begin collecting early. If we live forever, waiting is the best decision. Unfortunately we don’t. And that is what makes it tricky to decide. Gives us a call or fill out the reply coupon so we can help you determine a suitable time for you to begin collecting your social security benefits.
Can You Say Superannuation?
Many senior citizens will say that their greatest
financial fear is losing their money in a risky investment. A large number of older investors will not even consider any kind of investment that involves risk of principal. The majority of those with this mentality tend to have a fairly black and white picture of risk, with little or no concept of the tradeoff between risk and reward. While much of this perception stems from the Great Depression, recent market volatility and corporate scandal have only reinforced these fears in many older Americans. However, most retirees actually have another, even greater fear, which is superannuation, or the possibility that they will outlive their income. This fear is actually much more grounded in reality than the fear of losing principal, because statistically it is far more likely to happen. And even though many senior citizens will readily admit to concern over both of these issues, a large percentage of them fail to address their situations accordingly. But while losing the principal in an investment may be traumatic, the prospect of running out of money when you are too old to do anything about it is terrifying. An example will clearly illustrate this issue: Sam and Sally Conservative have both just retired from their corporate jobs. They are both age 65 and
are looking forward to many golden years ahead. They have $350,000 saved in IRAs that are invested exclusively in CDs. Assume that they had a combined income of $80,000 before they retired and have also begun receiving a combined $22,000 a year in Social Security benefits. Assume also that Sam lives to age 85 and Sally lives to be 91, and they will need income equal to at least 70% of what they earned before retirement. This means that their savings must generate at least $34,000 per year in order to meet their goals. If their retirement savings earn 5% annually in CDs, then $34,000 a year will exhaust their IRA balances in just under 15 years. This would leave them with just their Social Security income to live on for the rest of their “golden” years. On the other hand, if the Conservatives invested in a conservative diversified portfolio earning a hypothetical 8% per year and reduced their payout to $32,000 per year, then it will take 27 years to exhaust their savings. While no investing program can guarantee profits, it may be wise to consider potential risk in investing to possibly offset the other risk of living too long. If you are not sure which of these two types of risk you should be more concerned with, call us. We can review your situation and show you how to balance risks appropriately.
These articles are not intended to provide tax or legal advice and should not be relied upon for such. They are summaries of our understanding and interpretation of some of the current laws and regulations and are not exhaustive. Investors should consult their legal or tax advisor for advice and information concerning their particular circumstances.