Academic Research: Usually Better to Claim Later

Another study from the National Bureau of Economic Research provides yet more compelling evidence that most people will be better off waiting to claim their Social Security benefits later, especially married couples.  The report, titled When does it Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules, is authored by John Shoven, an economics professor at Stanford University, and Sita Nataraj Slavov, a researcher at the American Enterprise Institute.  From the Abstract:

We find that at real interest rates close to zero, most households – even those

with mortality rates that are twice the average – benefit from some delay, at least for the primary earner.

Essentially, twice the average mortality means they are talking about 75% of households.  Yet in fact, 53% of beneficiaries start benefits right at age 62 and 83% have started before reaching age 66, Full Retirement Age currently.  Therefore, the vast majority of these folks are getting it wrong, and would be far better off claiming later, for some couples, according to the study, adding upwards of $250,000 to their cumulative benefits.

You can follow the link above to the abstract where you can purchase the full study for $5.  Or, for a good overview of the study, Robert Powell, publisher of Retirement Weekly, had this article in yesterday's Wall Street Journal: RETIRING: With Rates Low, it Pays to Delay Social Security.

Wake Up Call to Gen X on Social Security!

Kristin Maschka, author of This Is Not How I Thought It Would Be: Remodeling Motherhood to Get the Lives We Want Today, calls in her blog at Huffington Post for Gen X to lose their skepticism and cynicism about Social Security.  She points out the facts that while the system faces a shortfall (in about 20 years), this is one "very fixable problem".

It is disheartening to hear Boomers declare their intention to sign up to start benefits at age 62, "...before they run out of money."  For most Boomers this is costly mistake, resulting in a decrease in lifetime benefits that can easily exceed $100,000 and much more for a married couple.  Even more disheartening, post-Boomers commonly state their belief that "Those benefits won't be there for me at all."

In fact the benefits will be there, in all likelihood in full as scheduled, since the required fixes are relatively mild and pain free.  I applaud any effort by thought leaders like Kristin to get out the word!

Social Security will be there for young workers!

Mark Miller's excellent article today on Reuter's chronicles the widespread pessimism common among younger workers about Social Security:

Some 76 percent of young Americans don't think Social Security will be able to pay them a benefit when they retire (Gallup); 86 percent would like to divert the taxes they pay to Social Security into private accounts (Pew Research Center); 48 percent of Americans under 40 think the system is in crisis and about to go bankrupt (Lake Research Partners).

I hear this from younger workers (under 40) all the time:  "Social Security?  That's not going to be there for me..."  Not surprising given that so many of their parents have the notion that they need to start their benefits right away at age 62, "...before they run out of money."  Just as two wrongs don't make a right, two incorrect perceptions don't make a truth.

Fortunately, Mr. Miller steers us to a thoughtful report, A Young Person's Guide to Social Security, by  Kathryn Anne Edwards, Alexander Hertel-Fernandez, and Anna Turner.  This thorough document carefully explains the Social Security program, addressing both its strengths and weaknesses.  They review the many fixes that can reasonably be implemented to stabilize the system - including for those who are just now entering the workforce.

Whether a Baby Boomer or a twenty-something, the smart financial bet is that Social Security will be there for you when you start your benefits, so you should plan accordingly.

Turning to Social Security Retirement Benefits

Earlier this year, as I looked more and more into the challenges and prospects for soon-to-be retirees - the two-thirds of us who do not have huge nest eggs - I discovered that Social Security benefits will be the critical component of our retirement finances.  The past six months I have dug deeply into this program - the largest single financial program operated by the federal government.

I learned how deceptively complex Social Security is.  I mean, I just go down to your local office, sign up, and receive a monthly check for the rest of your life, right?  (Or, skip the trip to the local office and sign up online in minutes.)  What could be simpler?

As you surely know by now, I can start my benefits any time between the ages of 62 and 70, and therein lies the complexity: when I start can make a huge difference in my cumulative lifetime benefits, depending on how long I live.  For married couples - I fit in that category - the complexity multiples because of rules governing spousal benefits and survivors.  It turns out that the simple decision to sign up can cost me a lot - easily over a $100,000 - if I get the timing wrong.  And, what's true for me is true for you.

So, I created a new online analysis tool to share some of the insights I gained in my research with you.  I also created a Social Security Alternatives Report that provides you an in depth analysis of how your claiming age affects your cumulative lifetime benefits in order to determine the claiming age that best serves you and your spouse.  (I also have a beta version available of this report for singles; versions for divorcees and widow/widowers are coming soon.)

For those of us in our fifties and sixties, there is little time for the miracle of compound interest to work on our financial nest eggs, battered as they have been in the financial crisis.  Social Security benefits, by contrast, offer us one area where we can control part of our financial future, especially by letting the amount of these benefits grow by delaying claiming them.  Inflation-adjusted, not subject to the gyrations of the financial markets, and guaranteed by the federal government, Social Security is one terrific program.  Future posts will continue for the time being to focus on Social Security and how you can use it to your lifelong benefit.

Are Four More Years of Work a Retirement Panacea?

Alicia Munnell, Director of the Center for Retirement Research at Boston College, made this recommendation yesterday on the Smart Money (a Wall Street Journal publication) Encore Blog: work four more years to defer drawing down on retirement accounts, allow those accounts to grow longer, and receive an increased Social Security benefit. Otherwise, “… [you] are going to face a severe decline in living standards.”

That is fine advice, if you love your job (and your co-workers), and if you have the health to continue with work, and if you can keep your job… This is not the case for so many of us, a sentiment echoed in many of the comments. Wrote “DJ”, “Nice idea, but this opinion disregards a basic reality. Most companies do not want you working for them in your 60′s, actually even once you get to your 50′s the reality is most companies don’t want you anymore and you will be the first to go and oh BTW – good luck finding another job.” “Workingstiff” was even more to the point: “If I have to work until age 70 I would rather be dead.” What is a fifty or sixty-something to do?

Fortunately there are alternatives to just sticking it out as long as you can at the daily grind. Are surrendering those years to the job worth it for the increased financial security? Can you make different choices that reap the same degree of financial security without sacrificing those years to drudgery? Of course, you can. Examine how much flexibility you have in your spending, both near term and long term. Consider finding work (or part-time work) you love that may not pay as much, yet covers your essential expenses. You just have to be willing to take a hard look at what is most important to you. Then, design a plan that makes the trade-offs that work best for you.

What is Retirement, Anyway?

It used to be that retirement meant we stop working, stop earning, and indulge in leisurely pursuits until our time runs out. Lest we stray from this path, a massive advertising effort by the retirement industry reminds us constantly of our need to amass a daunting fortune of savings before we can dare consider retirement. Whatever else, we are warned to avoid any prospect of running out of money before we run out of life. The new mantra for a “prudent” retirement is to work longer, save more, retire later.

Or not. Mounting evidence suggests that retirement today is less about leisure and more about a transition to a different mode of daily activity. It is less about work to pay the bills and save for retirement and more about investing our remaining time where we experience the most social impact and benefit. We are seeking to focus our efforts where we can make a lasting difference.

Instead of a life of golf and bridge stretching to the distant horizon, the new retirement can be busier than the work life that preceded it. It can take many forms: starting a business, volunteering, work for a not-for-profit, teaching, the Peace Corps, AmeriCorps. The common thread is a desire to leverage a lifetime of experience to the benefit of our families, our communities, our societies. While this work may or may not generate any pay, it must be gratifying to be the new retirement.

A recent book that weaves together many of the threads of this emerging trend is The Big Shift: Navigating the New Stage beyond Midlife by Marc Freedman. Freedman takes us back through the history of how society conceives the various stages of life and how that societal perception evolves over time. He proceeds to make a compelling case for a “new stage” that lies between our early working lives and the traditional view of a retirement of leisure before our eventual decline with old age. For more insights into this new stage, check out his website Encore.org.

So, as we approach the traditional retirement age, for those who love their jobs, keep at it. For those who think they desire a leisurely retirement and have the means to afford it, congratulations and good luck! For the other 80% of us, the potential of an “encore” career to afford a transition from a life of “work” to a life that nurtures our souls while it continues to support our pocketbooks is worth a closer look.

Feeling Like the Only One without a $500,000+ Nest Egg?

Fisher Investments, a financial advisory firm, is running an ad on the home page of the Washington Post (among others) titled, “Don’t Run Out of Money in Retirement.” The opening sentence: “If you have a $500,000 portfolio, download the guide by Forbes columnist Ken Fisher’s firm” for a “must-read guide” for “rebuilding your portfolio.” By implication, if you don't have a $500,000 portfolio, don’t bother them…

If you are feeling left out, you can take some comfort in the fact that you have plenty of company. According to Federal Reserve data from 2007 (most recent survey – before the carnage of the financial crisis), nearly 90% of U.S. households have less than $500,000 in total net worth, a number which includes non-financial assets like your home. You can be sure that few have a $500,000 portfolio for Fisher Investments to manage.

You might wonder if the numbers look much different for those in age groups closer to retirement. Not so, according to the Fed. It turns out that the median net worth of those with a head-of-household 55 and older is around $250,000. Since “median” means half have less and half have more, you can imagine that those with a $500,000 portfolio are a small fraction of those at or near retirement age.

If you find yourself in this same boat with the vast majority of Americans, take heart: a comfortable and secure retirement does not have to rely on amassing the gargantuan nest eggs suggested by the investment advisors. Millions are successfully retired on far less and you can too. The trick is to plan a retirement lifestyle within your means. You have far more control over your spending choices than you will likely have over the investment returns on your existing portfolio, so put more of your energy into researching and evaluating your spending options in retirement.

Do not let the Ken Fishers of the investment management industry hook you with their misleading and self-serving obsession with the size of your nest egg. By all means, do what you can to grow your nest egg in the time horizon you have; however, devote more of your time to focus on a solid plan for spending that nest egg. The return on that investment of your time could be far greater.