I have had retirement actively on my mind for a few years now even though I anticipate my retirement is more than a decade away. I think that is how it is and must be these days. Gone are the days where you only needed some savings and could depend on a pension and Social Security. Now the message increasingly is that you need a list a million dollars to retire comfortably.
It was the million dollar message that first garnered my full attention. I thought to myself – how in the world will I amass that much money in the relatively short savings period I have left? As a single mom for so many years I spent more time surviving and less time feathering my nest. Not unlike other parents I imagine – singular or combined – raising children came first and retirement was pushed to the end of a very long money needs list. Until I started to get older and I realized that my time was coming. These days, my mental money rotation is all about the years ahead and how I will set the stage today to enjoy them.
I consume retirement guidance like the Cookie Monster consumes cookies. I am always reading and watching videos about smart retirement choices. I know that given my late focus on the topic (as opposed to those who now are nourishing 401ks from their 20s), I need to be that much more savvy and practical. As all my readers are surely aware – I lean toward risk aversion when it comes to money and long-term planning. I am all about the bird in the hand.
I have been of the mind lately that the best thing to do in regard to taking Social Security benefits is to wait until age 70 to start collecting them. There are lots of views on this, but they all come down to – in my mind – betting on your longevity. I want to bet that I will live a long life. I share with you today a question from Liz Weston’s financial column that provides a great summary of the debate and a fairly solid answer.
Q: I read your recent article in which you advised waiting before starting Social Security benefits. Is this good advice for everyone? You probably know that there is a break-even age around 85, so that if you die before 85, starting benefits early is better, but if you die after 85, starting late is better. “Better” means you receive more money. So, right off the bat the advice to delay is wrong for half the people in their 60s, since about half will die before the crossover, and if they had delayed, they lost money.
A: The problem with do-it-yourself financial planning is that people often focus their attention too narrowly and ignore the bigger picture. That’s what leads them to do things like pay down relatively low-rate student loan debt while failing to save for retirement. They may focus only on the expected returns of each option while ignoring the tax implications, company retirement matches and the extraordinary value of future compounding of returns.
Obsessing about the break-even point – the date when the income from larger, delayed retirement benefits outweighs what you’d get from starting early – is often a mistake, financial planners will tell you. There are a number of other considerations, including the value of Social Security benefits as longevity insurance. If you live longer than you expect, a bigger Social Security check can be enormously helpful later in life when your other assets may be spent. Also, if you have a spouse who may be dependent on your benefit as a survivor, delaying retirement benefits to increase your checks will reduce the blow when she has to live on just one check (yours) instead of two (yours and her spousal benefit).
In his book “Social Security for Dummies,” author Jonathan Peterson offers a guide to figuring out your break-even point based just on the dollars you can expect to receive (rather than on assumed inflation or investment returns). In general, the break-even point is about age 78. That means those who live longer would be better off waiting until full retirement age, currently 66, than if they started early at age 62.
Currently, U.S. men at age 65 can expect to live to nearly 83, and the life expectancy for U.S. women at age 65 is over 85.
You can change that break-even by making assumptions about inflation and your future prowess as an investor, but remember that the increase in benefits you get each year by delaying retirement between age 62 and 66 is about 7 percent.
It’s 8 percent for delaying between age 66 and age 70, when your benefit maxes out. Those are guaranteed returns, and there’s no “safe return” anywhere close to that in today’s environment.
Questions may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
I am with Liz on this one. The safe money is on waiting until 70. Since I plan to live until I am 99 that is the route I will be taking. Until then I will have to use savings or other revenue if I want to pursue my retirement goal of being a lady of leisure.
Day one thousand three hundred and twenty-eight of the new forty – obla di obla da