Senior Class – HumbleDollar Making sense of immediate annuities – start Social Security at what age?

Senior Class – Jonathan Clements  |  August 14, 2021

FORGET BUYING a home or paying for college. In terms of complexity and cost, nothing comes close to retirement—a topic that encompasses saving, investing, taxes, Social Security, health care expenses and countless other financial issues. Fortunately, there’s a growing body of research to guide us, and some of the best studies come from Boston College’s Center for Retirement Research (CRR). Here are just some of the insights I’ve lately garnered from CRR studies:

Valuing annuities. Many retirees question the value of immediate fixed annuities that pay lifetime income and, in one sense, they’re right. The present value of these annuities works out to about 80 cents for every $1 invested, meaning the typical retiree wouldn’t recoup the full amount of his or her investment plus interest.

On top of that, of course, there’s also the risk that you’ll lose the life expectancy lottery and recoup far less than 80 cents. Still, for affluent individuals who have looked after their health, the payback will likely be well above 80 cents. Moreover, as a recent CRR study notes, the value of income annuities goes beyond raw dollars. There’s also an insurance component.

The notion: Retirees can generate more income from their nest egg if they buy income annuities because they don’t have to worry so much about outliving their money. This is one reason I plan to stash a significant portion of my retirement savings in immediate fixed annuities.

An added reason: The resulting stream of large, predictable income will allow me to invest much of my remaining money in stocks—and, fingers crossed, that should result in greater long-run wealth.

Claiming Social Security. Like many others, I’ve lamented how many retirees claim Social Security benefits at age 62, which is the earliest possible age, rather than delaying benefits so they get a larger monthly check. But it seems retirees are wising up. There are two key ways to look at the data.

The usual way: Calculate what percentage of those claiming benefits each year are age 62. That number has been trending lower since 2005 and, as of 2019, stood at 34% of female claimants and 31% for men. But as CRR researchers note, the number of folks turning age 62 each year has been growing rapidly in recent decades and that distorts the data.

Why? There are more 62-year-olds than, say, 68-year-olds. That’s why CRR researchers offer an alternative way of looking at the issue: They calculate the percentage of those turning age 62 each year who opt to claim Social Security at that age. That number is even lower, with just a quarter of 2019’s 62-year-olds opting to claim right away.

In a separate study, the CRR examined whether Social Security’s actuarial adjustments are correct. In other words, based on current life expectancies and interest rates, are you—on average—likely to do equally well whether you claim benefits at, say, age 62, 66 or 70? It seems not.

CRR researchers concluded that the reduction in benefits for claiming at age 62 rather than 65 is too large given today’s greater life expectancy and lower interest rates. (Those lower interest rates also mean you’re less likely to come out ahead by claiming benefits early and then investing the money in bonds.)

The implication: For the typical retiree, it makes financial sense to delay benefits, and that’s especially true for high-income earners, who tend to live longer than average.

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Source: Senior Class – HumbleDollar

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