FREE NEWSLETTER
THE LONGER I SPEND in retirement, the more convinced I am of the benefit of reliable income. One of retirement’s most pronounced psychological shocks is the loss of a regular paycheck. After four decades of working, you get used to one coming in every two weeks. The occasional consulting paycheck, even a small one, makes me inordinately happy.
I’m fortunate to have a traditional defined-benefit pension. It built up over 31 years of working with a large aerospace engineering firm. Unfortunately, the plan was frozen three years before I stopped working. Those last three years would have added almost $1,000 a month to my pension. And, as with almost all private-sector pensions, the payment I receive has no annual cost-of-living adjustment.
My wife earned a small pension while working for a local hospital in the 1990s. About 15 years ago, she received notice that the system was offering a lump sum payout to former employees. It amounted to about $30,000. Knowing that I had a pension, we opted for the lump sum and rolled the money into her IRA.
In January 2023, we started my wife’s Social Security retirement benefit. We still plan to delay my benefit until I reach age 70. This is the claiming strategy for couples favored by many financial planners—the lower lifetime earner claims early, while the higher earner delays, thus ensuring the maximum survivor benefit. The advantages are also clearly demonstrated by Mike Piper’s Open Social Security tool.
Another reason I delayed benefits: I still had opportunities to consult. Prior to reaching your full Social Security retirement age (FRA) of 66 or 67, you can both collect Social Security and have earned income, but your benefit may be reduced. In 2024, retirees can start losing benefits once they earn $22,320.
If my 2023 income had matched my 2022 income, I would have lost almost half my Social Security in 2023 to the “earnings test” if I’d been collecting benefits. As it happens, the projects I thought I’d work on in 2023 never came to fruition. I recently reached my FRA of 66 and six months, which means I can now work as much as I want without any reduction in Social Security benefits.
That makes this a good time to reevaluate my claiming decision. A few years ago, I wrote about the idea of “buying an annuity” from the Social Security Administration. The argument still makes sense to me, although today’s higher interest rates make delaying benefits somewhat less attractive. For now, I’m still delaying benefits, though I plan to reevaluate that decision regularly.
Commercially available immediate annuities are an obvious way to create steady retirement income. But they aren’t popular. Why not? Many folks seem to view the payouts as low and they don’t like turning over a large chunk of their savings to an insurance company. The “what if I die early” question is always present.
The process of converting a lifetime’s savings into a secure income stream is more complicated than many folks realize—and not discussed nearly enough. Over decades of working and saving, I had many conversations with friends and colleagues about investing for retirement. But I don’t recall many discussions about how to generate retirement income. It’s especially complicated for married couples. Ensuring Vicky’s financial security is very important to me—and it’s a big reason I’ve so far delayed claiming Social Security.
Rick, I have a traditional pension with no COLA’s.I mentioned recently I had reached FRA and was considering suspending my social security and using funds to bridge my social security to age 70. It guarantees
8% a year plus COLA’s which would mean an additional 24% and additional COLA’s to increase my social security. From what I’ve read, most retail investors can’t get a guaranteed 8% a year. I’m about to pull the trigger and do it, knowing that this will help mitigate the inflation that has eaten into my non-COLA pension in the last few years.
Part of our retirement plans (many years down the road) include rental properties. We look at rents collected each month as a sort of paycheck.
Unlike an annuity, the initial capital investment is still under your control in the sense that the asset can be sold and moved to something else if you choose to. While many pensions do not have a cost of living adjustment, the market rate for rents will increase over time, and this serves as an inflation hedge.
Certainly there are other challenges, and rental properties are not hands off even if a management company is used, however, it can be a nice option for regular cash flow in retirement.
You made the right decision taking the pension. I retired 2 years ago and taking a pension instead of a lump sum was one of the best things I ever did. Along with waiting until my full benefit age before taking SS, I have almost the same take home pay I had when I was working and none of it is correlated to the stock market. Its true our pensions are fixed but SS isn’t. So at least half my income is adjusted for inflation. I’m using my 401K/IRA to make up for inflation on the pension. God worked things out great, my pension comes on the 1st of the month, my SS on the 15th, so I get paid two times a month just like when I was working. It couldn’t be better.
I have some problems with the Open SS calculator. It’s is not transparent and provides no rationale for its output. I am 67.5 and still working and in my simple case it’s tells me NOT to delay until 70.
So it seems the author of Open SS believes that the “lost opportunity cost” of investing SS income now is higher than the benefits of waiting for a higher benefit. That is arguable. It would be much better if he laid out the exact assumptions behind that.
Did you read the ABOUT page of Open SS calculator? Mike Piper even points you to the source code that includes a readme file.
For people really interested in the details of how this calculator works, I’d encourage you to check out the source code, available at the following link. (The README file is a good place to start.)
https://github.com/MikePiper/open-social-security/
Not sure he could be any more transparent.
I read the README, and it does not include “lost opportunity cost”. So based on his calculations waiting until 70 is a load of bunk? As opposed to nearly all other retirement advice including the above article. I gather his assumption is based on me dying before the benefit of waiting until 70 catches up.
My feeling is that Mike’s calculator is not that helpful. It does not include COLA adjustments to SS payments, nor does it include the “lost opportunity cost” of investing any SS payments if you start early.
I’ve run the Open SS calculator several times and feel that I just don’t trust the results:
—We’re the same age (almost 64).
—Our estimated benefit on the SS site is identical. He makes (way) more money than I do, but I’ve made enough for long enough that I’ve maxed out the annual SS number for some years now.
—We’re both still working.
The Open SS calculator says I should claim now and he should claim at 70. I don’t get that advice. If I claimed before my FRA (67) while still working, my benefit would be drastically reduced because of the earnings test. So this seems like bad advice to me.
I also don’t understand why given the above parameters about age and SS benefits, it would suggest that he be the one to wait until 70. It seems like you could flip a coin and have either of us wait until 70, but the tool always says it should be him.
Maybe I’m missing something.
There is a checkbox near the top “Certain situations require additional input”. Did you check that? There is an option to indicate you are still working.
That’s what I was missing! Thanks.
My wife and I have been living off our retirement assets since we retired during COVID and living off our retirement assets. I have used Mike Piper’s Open Social Security as a tool to determine that age 70 for each of us would be the best time to claim to obtain maximum lifetime income.
Due to returns on our investments our asset balance has changed very little. I have targeted a decrease of certain percentage of our beginning assets at which we would trigger my wife, the lower earner, claiming Social Security. This would allow us to decrease future withdrawals from our assets to help meet our expenses, and still allow me to claim at 70 to maximize survivor benefits. At our ages (65 and 66) there is really no bad time for only my wife, the lower wage earner, to claim as we have no idea when the first of us are going to die, but it’s imperative for me, the higher wage earner, to delay to age 70. At this time however, the plan is to delay, delay, delay.
One depressing question that comes to mind is what if one of us claims earlier than 70, say at FRA, and then the other one dies before 70? Then neither of us gets the maximum benefit. I guess a way to hedge against this would be a term life policy ending at 70?
As I understand it, if the spouse who was waiting until 70 ends up dying at, say, 68, the benefits as of that age will be available as a survivor benefit — so the delay would still offer some advantage.
One option that younger adults have now that we didn’t have is term life policies that include a long term care benefit. We canceled our term life only when our assets were large enough that we no longer needed the financial backstop. If it had included a long term benefit we probably would have continued paying the premiums.
l also like getting that part time consulting paycheck which I have been doing since retiring at 61 from Megacorp 6 years ago. Our solution-or should I say our FA’s-to the annuity COLA conundrum is a 10-year rolling TIPs ladder. It provides at least some inflation protection while maintaining control of the assets. I am almost 68 and planning to wind down the consulting soon leaving short window to do a Roth conversion or two, then claim SS at 70. My wife is about 3.5 years younger-her lifetime income is somewhat lower but not hugely. She plans to claim at FRA at around the same time I claim. I am also looking at QLAC to turn at 81-after 10 years of deferred comp pays out. Hopefully that helps as we age.
If an annuity with a COLA was available I think it is safe to say that the initial payout would be much smaller than an immediate fixed annuity that cost the same.
My comment about a COLA annuity was intended to be a reply to mytimestotravel’s comment below.
But without a COLA, the payout would be worth considerably less over time. My pension payment is certainly worth a lot less than it was in 2000. I would take less up front for a guarantee that payments would have the same buying power in the future.
You can purchase with fixed inflation amount, say 2%
That would have been inadequate over the last few years.
I would be happy to invest in an immediate annuity if it came with full inflation protection (not a fixed 1% or 2% a year). I already have a pension with no COLA and am reluctant to add another income stream with the same problem. Dying “early” is not a consideration.
The great majority of my income is a pension without a COLA. For over 15 years it has not been an issue. Guess why?😃
My wife and I purchased an immediate annuity last year. It was indeed a big chunk of our savings, and it was a real heart-in-the-throat moment signing the contract. But now, “annuity day”, when the deposit hits our bank account, is my favorite day of the month. Once we start receiving social security in a few years, the annuity plus SS will cover our basic needs. Having a guaranteed income for life is pretty sweet.
Thanks for this, Rick. It is hard to kick the paycheck habit! But it’s been soooo worth it.
I was surprised to learn from you and Quinn that pensions usually lack a COLA.
That was a nasty shock to me, too. I grew up in England, where company pensions do come with COLA increases.
You and Jonathan are too polite to say it but it seems the Brits are more sensible than us.
My situation is similar and yet quite different. I retired fourteen years ago from full time employment, I started working party time, I receive a pension with no cola, I begin a nice S.S. next month at which time she will be bumped up due to speak benefit, my wife has a small pension and a small S.S. every month.
I was only 51 when I retired. If I wanted a continued income for my wife after my passing my pension would have been reduced by $500 per month. Instead, I chose to not guarantee her my pension if I proceed her in death, instead we have invested that $500 difference every month for the last fourteen years.
Nice article, Rick. I have many of the same moving parts as you: monthly pension with no COLA, part-time income, tax-deferred savings tied to a ticking tax bomb, and eventually Social Security with a spousal benefit. When to take Social Security is a bit of a conundrum, especially considering the calculators tell me to take it sooner rather than later in contrast to the conventional advice. It would be a clearer decision if I just stopped working.
When I ran OpenSocialSecurity in Dec, many times, I ended up in a similar situation to Nuke Ken. My spouse, lower earner, is 4 years older and already taking SS early. She had hit FRA, and when I ran the numbers with me electing at my 63rd Bday, and electing a normal health non-smoker for longevity, the difference between taking SS at present vs waiting to optimize was only 1.7%. After reading Piper’s book, I came to the conclusion the 4 year age difference between my wife and I explains most of the reason why delaying, in my case, provides less benefit.
Ken, thanks for reading and sharing. I’d be curious to know why the calculators are telling you to start SS earlier. I saw you wrote you tried Mike Piper’s Open SS. Based on my experience his tool typically recommends the higher earner delay, and the lower earner claims earlier. That’s what we did. I’m curious if there is some variable I haven’t experienced, like a large difference in ages, that drives the solution. I expect a full Engineering analysis and memo in a few weeks!!
Rick, your last sentence made me laugh! See the “executive summary” below in response to Jonathan.
You’ve mentioned before that Open Social Security suggests both you and your wife take benefits early — a strange result. It would be great if you could figure out why you’re getting that result. I assume it has something to do with your pension, but perhaps there are other assumptions you’re making that are skewing the recommendation.
Jonathan, I think the reason is two-fold: 1) my wife is a few years older than me and 2) she only qualifies for a spousal benefit. We can’t get the spousal benefit until I start taking my benefits. The pension isn’t a factor in the calculation. Make sense?
That somewhat makes sense. But I think you’ve said Open Social Security recommends that you take benefits at 63. Would your wife then be at her full Social Security retirement age (between 66 and 67), and hence be entitled to the full 50% of your benefit?
No, that’s the unexpected part about the results. She hits her full SS retirement age when I am 63 and 9 months, if I recall correctly. Based on that, I’ve always looked at 64 as the minimum age I would start benefits. The calculator said for me to take it at 62 and 3 months and my wife 8 months later, a little less than a year before her full retirement age. The green area (99-100% payout) is fairly large in the results. The “penalty” for me deferring to age 64.5 is less than 1%. If I wait to claim until I’m 65, I end up solidly in the blue area (95-99%). There’s your engineering memo, Rick!
Thanks – no red pen necessary!
Given that your pension has no COLA, I’d be inclined to wait until at least 63 and nine months, so you have a tad more inflation-adjusted income and your wife potentially gets a larger survivor benefit. In fact, I’d probably wait even longer, especially if you feel your retirement savings won’t grow enough to offset inflation’s impact on your pension.
Right now I think it’s unlikely I would start SS before age 64, despite what the calculator says is optimal. A wild card for me is how long I keep working part-time for pay. I need to better understand exactly how the SS benefit reductions for excess earnings before FRA are eventually “paid back”. I know my best 35 years of earnings are behind me.
Benefits lost due to flunking the earnings test (ie, making over the earnings test limit), are “paid back” in the form of more delayed retirement credits, thus raising your future benefit. A simple example to illustrate: say you start receiving your SS retirement benefit at 63, and it’s $2500/mo or $30k/yr. Then, your income exceeds the limit such that you flunk the earnings test in a way that reduces your benefit by, say $500/mo or $6,000/yr. The next year, your benefit check won’t be reduced by $500/mo to pay those benefits back–your benefit simply be stopped for the number of months necessary to reduce total your yearly benefit by $6,000 (rounded up). Your benefit will then be re-started at whatever level it was previously, + an inflation adjustment. Your earnings record will then be credited for those months you didn’t receive a benefit, and your benefit will eventually be re-calculated to reflect these additional earnings credits. I know that’s probably clear as mud…!
Perhaps if I’ve overlooked something important another HD commenter will jump in and helpfully point that out. But that’s the earnings test basics (for a case like yours) in a nutshell.
Another commenter posted this link, which I think is helpful:
https://www.ssa.gov/policy/docs/program-explainers/retirement-earnings-test.html
Thanks. There’s a comment below with a link that cleared everything up for me.
Rick, I appreciate your writing on this topic. It’s right at the top of my list of financial questions.
Edmund, thanks for reading and sharing. Good luck with your planning.
My method is interest and dividends. With a lot of assets in my brokerage account, I can just draw a portion of my income every month, along with collecting social security. And it does seem to increase with inflation – every year, most of my stocks raise their dividends. So I can increase my monthly check every year, if I need to do so.
Works for me, but probably not for most people.
Ormode, thanks for reading and sharing. I’ve seen many retirees with a similar strategy while doing taxes. We get many clients with a SS benefit and some combination of 1099s, either interest, dividends, or retirement plan withdrawals. even the clients with traditional pensions, the amounts are often small. As I wrote in an earlier article, a number of people were surprised by the increased interest they received due to higher rates.
It’s helpful to know that money withheld by Social Security due to the retirement earnings test is credited back once you reach full retirement age. This SS link explains and illustrates.
Thank you for this. It addresses my question in the thread above. Glad I scrolled down.
Thanks for reading and sharing. 1PF! You are correct that the withheld $$ are credited back, and any new earnings consider in your future benefits. But they are spread across your lifetime, so it’s less of an impact as current benefits are.
Ensuring Connie’s financial security is my top priority similar to yours, Rick. In fact, there is an article in the queue just on that subject.
I used a strategy a bit different than yours. It involves pension survivor annuities, survivor Social Security (which I started at FRA while still working part-time and invested in muni bond funds until we needed to SS), life insurance and income from tax free interest, plus dividends and accumulated investments.
The interest and life insurance are tax free. Our plan considered the Connie is four years older.
Dick, thanks for reading and sharing. I should have mentioned that I selected a 75% joint and survivor option for my pension. We also both have traditional and Roth IRAs. Like, you we have two houses. At some point we or she could turn one or both into liquid assets for her needs.
Hi Richard, this is Chris. Good article. We are going through a similar time now. All of this not having a regular paycheck is a shock. So far it is going ok.
Chris, thanks for reading and sharing. Good luck with retirement income planning. It gets easier.