Friday, June 23, 2017

Delaying Social Security Claims (or Not)

Should all retirees delay claiming Social Security benefits?

That's the question I was asked on Dan Farnsworth's Boomer Income Ideas website this past week. Since this a common question and Social Security retirement benefit claiming is so complicated, I'll share my thoughts on the topic with you, as well. (Dan's interview is scheduled for release in July and I'll post a link when it is available.)

First, a very quick review of how delaying Social Security benefits works. Workers can claim retirement benefits as early as age 62 but for every year they delay claiming they increase their benefits by about 8%. There is no additional benefit to claiming after age 70. Survivors benefits may also be affected by the age at which retirement benefits were claimed by the deceased spouse, so if hubby claims at an early age his widow may pay the price.

Households may receive a larger lifetime benefit by delaying claiming if one or both spouses live a very long time, say, into their nineties. If neither does, claiming earlier can provide a larger lifetime benefit. If the retiree lives to somewhere in the neighborhood of median life expectancy the claiming age doesn't make a huge difference but that isn't something we can plan on.

The easy answer to Dan's question is no, not everyone should delay claiming, easy because there are precious few meaningful retirement finance strategies that every retiree should implement. Off the top of my head I can think of a few retirement scenarios in which retirees might not want to delay claiming, though there are no doubt more:
  • Retirees who have over-saved
  • Retirees who need the income right away
  • Lower-earning spouses
  • Retirees in poor health
  • Retirees convinced that Social Security is going away
I sometimes have readers contact me for planning help who have saved $10 million or more for retirement. (I often wonder exactly what retirement finance problem these readers would have me solve.) It really doesn't matter a bit when they claim Social Security benefits, or even if they claim.

The risk for people who have "over-saved" is that some people aren't as over-saved as they believe. I've had readers ask if they can retire at age 50 with a million dollars. (They can't.) Households that have saved two or three million dollars aren't totally free of longevity risk and should they deplete their savings they may eventually regret having claimed benefits early. In general, though, retirees who saved a ton of money don't need to worry much about delaying Social Security benefits. The benefits won't make much difference either way.

At the other extreme, a large majority of Americans will have very little in the way of retirement savings. About half will have almost no savings. These retirees may need the income as soon as they retire and will not be able to postpone claiming.


The exception to this scenario is households with little or no savings who can delay claiming Social Security benefits by working longer. In addition to increasing Social Security benefits, working longer provides a number of benefits for the under-saver. Every additional year worked reduces the length – and thereby the cost – of retirement. It provides an opportunity to increase retirement savings. It may provide another year of company-paid health insurance.

Couples analyzing their Social Security benefits face an even more complex task. I used to analyze my household's options and it found 13,651 claiming scenarios. Often, both spouses claiming at the maximum age does not generate maximum lifetime benefits if one or both live a long life.

It is often most beneficial for the lower-earning spouse not to delay claiming past full retirement age (FRA, about 66 years for those claiming benefits today) and for the higher-earning spouse to delay claiming to age 70. It is typically beneficial for the lower-earning spouse to wait until FRA, however, and not to claim at age 62.

(For the record, I plan to claim at age 70 and my wife claimed at FRA.)

Retirees who have good reason to believe they will not live beyond median life expectancy for a healthy person of their age and gender might consider claiming benefits earlier. Like retirees on the borderline of "over-saved", however, guessing how long you will live is risky.

Mortality tables tell us how long a large group of randomly selected people like us is likely to live but they don't tell us, for example, how long Dirk will live. All American males my age might on average live another 20 years, but I may die tomorrow or in 35 years. Best to plan on the long side.

My son tells me that students in med school are taught that doctors are notoriously bad at predicting when patients will die unless death is imminent. In 2001, the FDA approved a drug called Gleevec that resulted in "converting a fatal cancer into a manageable chronic condition." If you expect a short retirement but experience a long one, you may well regret having claimed Social Security benefits early.

Delaying Social Security benefits is like saving some acorns for a long winter.
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Lastly, if you're someone who fears that your Social Security benefits will one day be taken away and that fear causes you significant distress, I think you should claim early. As I wrote in What Makes Us Happy, the ultimate goal of a retirement plan is to make you feel safe and secure. If the fear of losing your benefits before you claim them outweighs your fear of lower income in your nineties, claim early.

These are a few examples of retirees who might not want to delay claiming Social Security retirement benefits. I don't believe the list is exhaustive, only that it shows that delaying claiming isn't always the right choice for everyone, but again, hardly any retirement strategy is.

All things considered, I still believe that most retirees should delay claiming Social Security benefits for as long as they are comfortable doing so. Delaying claiming is simply transferring some income from early in retirement until late in retirement for the benefit of those of us who do enjoy a very long life. It is the cheapest longevity insurance you can buy.

Delaying claiming your benefits isn't unlike a squirrel eating some acorns in the fall and hiding some for a long winter. You have to strike a balance between how much you eat today and how much you will have to eat if the winter is exceptionally long.

Unless you've saved $10 million dollars, of course, in which case you can eat whatever you want whenever you feel like it.


Boomer Income Ideas

Full Retirement Age,

Gleevec and CML.

Social Security Made Simple, Mike Piper.

Tuesday, June 6, 2017

What Makes Us Happy

I recently watched a brief video interview with Michael Finke entitled, "Risk Tolerance in Retirement Planning." It's a great return on a two-minute investment of your time.

Finke is the Chief Academic Officer at The American College of Financial Services and one of the retirement researchers I most respect.

Although his interview primarily addresses risk tolerance, the line that caught my ear was this one, addressed to retirement planners:
"Your goal is to make [clients] as happy as they can be in retirement and it may make them happier to have less anxiety about their investment portfolio."
The issue this addresses for me is how we, as planners, researchers or bloggers, view our goals. I think it also applies to how do-it-yourselfers view their own goals in developing a retirement plan. As Finke so succinctly states it, the goal is a happy retiree.

Those of us on the plan-development side sometimes think our job is to create the retirement plan that we think is best for the client. "Best" may mean to us the plan that survives the most simulations, the plan that eliminates worst-case scenarios, or the plan that uses retirement resources most efficiently, for example. Those are all pretty good standards, but they don't measure happiness.

Claiming Social Security benefits, buying fixed annuities, setting a portfolio spending rate and investing retirement savings are common retirement decisions that can play economic theory against client happiness.

Retirees who delay claiming Social Security benefits will receive greater lifetime benefit payments if they live a long time but lesser benefits if they don't survive long after claiming. Retirees who claim early will receive greater lifetime benefits if they don't live a long life but lower benefits if they grow quite old. In other words, to delay the claiming of these benefits is effectively to purchase longevity insurance and at an attractive price.

Most economists (and I) generally recommend delaying but most retirees don't for many reasons. The primary reason is probably that most retirees need the income right away and can't afford to delay. But, some think their Social Security benefits will be taken away so they should grab them while they can (I don't). Some are convinced in the absence of any supporting evidence that they simply won't live a long time. Still others who aren't as dependent on the income believe they should claim benefits early and invest them in the stock market. A wealthy retiree or one with a substantial pension might not need more longevity insurance. It is possible that delaying Social Security claims might not make these clients happier than claiming at an early age would.

If I recommend to a client that she delay claiming her Social Security benefits and she lies awake at night worried that the Social Security program will be shut down before she receives any benefits then I have not created a happy client. Though I will do my best to explain the advantages of delaying, if delaying is going to make her unhappy then claiming early is the "best" strategy if we agree with Finke.

If a large equity allocation or an annuity will keep you awake at night, don't let me talk you into one.
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Similarly, I have spoken with clients and readers who can't imagine handing over their life savings to an insurance company to purchase a fixed annuity. Readers have also told me that they would never consider investing their very dear retirement savings. Purchasing a fixed annuity might be a no-brainer for an economist or financial planner but if it doesn't make the client happy it isn't the right strategy.

If a large equity allocation or owning a fixed annuity will keep you awake at night, don't let me talk you into one.

Finke's video isn't only about happy clients, of course. It's primarily about risk tolerance. It's a brief video that I could summarize here, but I'll ask you to watch it, instead, because I'm reminded of a conversation I had with a retirement planner/author some time back. I told him that I had loaned my copy of his recent book to a friend.

"That's wonderful!" he replied. "But, next time how about being a sport and buying her a copy?"

Finke's video can be seen at Risk Tolerance in Retirement Planning.