Monday, October 21, 2013

I'm Not Ready for Social Security

My high school classmates will be eligible for Social Security benefits in a year or two. I need to write the rest of this post quickly before that sinks in and I feel old.

Aw, crap. Too late.

The age when you claim Social Security benefits might have a huge impact on your standard of living after you retire.

For some people, it's an easy decision. If you're no longer working and can't get by without the benefits, you should claim them as soon as you can. Since about 95% of American workers haven't been able to save much for retirement, a lot of households won't have to think long about when to claim benefits.

They'll take them as soon as they can get them.

Some people believe that Social Security won't be around for them because conservative politicians will eventually shut it down. But, 2015 will mark the 80th anniversary of the Social Security program and the 79th anniversary of conservatives' efforts to eliminate the program.

Yet, it survives.

Others believe that the “breakeven age” is so high that they're better off claiming early than expecting to live past about age 78. That seems a bizarre argument to me.

Social Security retirement benefits, formally Old Age and Survivors Insurance, are longevity insurance intended to mitigate the risk that you will run out of money when you are very old.

Breakeven is an argument that you don't believe you will live to age 80. Unless you have received bad news from your doctor, I would suggest that you have no idea when you will die and that you need to protect against the cost of living to a ripe old age.

If you don't plan to live a long time and you do, the cost of your lost bet is quite high.

Here's the argument. I know that if I claim early I will be significantly worse off should I live a long time. In fact, I know that my spouse's survivors benefits will be significantly limited if I claim early. But I don't want to die young and leave benefits on the table, so I'm betting I won't live to 80 or beyond.

This is probably the same guy who, at a younger age said, "Buying life insurance is just bettin' against yourself", or in other words, "I'm betting I live a long time." It shows a fundamental lack of understanding of insurance.

I don't imagine many people forgo homeowners insurance because their house probably won't burn down or auto insurance because they're pretty sure they won't have a major accident, yet they're willing to bet old age in the poorhouse that they won't live past 80.

Social Security retirement benefits and the intertwined survivors benefits for married couples can amazingly complex. If you can afford to delay those benefits even a year or so, you have strong financial incentive to do so and you will probably need help with your decision.

You can discuss this with a professional financial advisor, of course, but there are also some excellent websites that can help. One website, (MMSS) is available from the same company that provides E$Planner software. There are other websites, free and not, that I have not tried for the most part. Several are listed in this Wall Street Journal article.

I did try the AARP site. It provided recommendations similar to MMSS, but the inputs are fairly limited. It assumes you will live to your life expectancy, but there is a 50% chance that you will live longer than that. It doesn't let you see what would happen if you live to say, 85 or 90. Nonetheless, it recommends claiming as late as you can.

MMSS, unlike E$Planner, is a website so there is no software to download. You can run it from any web browser on any most hardware platform. It costs $40 the first year with an annual upgrade for $20, but unless your life changes dramatically, a few weeks is probably all you will need.

Next time, I'll show you the results of an actual scenario and what MMSS suggests in my post, "Need Help With Your Social Security Claiming Decision?" You may be amazed at the difference a good decision can make.

1 comment:

  1. Dirk,

    Great posts: straight talk on a subjects we hate to think about.

    The humor, the real world examples and dollar amounts all get your much needed message across.

    Thanks. Keep 'em coming.