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HumbleDollar has hosted a lot of interesting and useful discussion recently about the benefits of buying an annuity to provide guaranteed income to a retiree. Once you have decided to purchase an annuity, you are faced with the complicated choice of what annuity to buy. In 2012, Boston College’s Center for Retirement Research published a paper that posited that delaying your Social Security benefits and using other resources to fund your lifestyle was akin to purchasing an annuity from the Social Security Administration (SSA). Their take was that “buying an annuity” from the SSA was the “best deal in town.” I wrote an article about this a few years ago, and I thought it was worth rolling out again.
Since 2012 interest rates have risen and commercial annuities have become more attractive. Additionally, the SSA’s full retirement age, or FRA, has continued to rise. The last cohort to reach FRA at 65 was in 2003. In 2027, the FRA will max out at 67. Future retirees planning to wait to FRA before claiming their SS retirement benefits will be faced with a 3-year period if they choose to wait until the maximum claiming age of 70. Funding a 3-year bridge may appear easier than the previous 5-year gap.
One thing I’ve learned from preparing tax returns for lower incomes retiree is the importance of SS retirement benefits (another great topic on HumbleDollar). I, and others, have observed that there are many retirees whose sole retirement income comes from SS. The stark reality is that these retirees would benefit most from delaying their SS benefits, and increasing their benefits by some 8% per year of delay.
I tend to think of this decision in three groups. At one end you have retirees in desperate financial situations. They may need their SS benefits as soon as possible to live. At the other end you have folks with more than enough financial resources to retire. For them the decision on when to claim SS is much less important. They can do what they want. For a large group of retirees, SS is important but not necessarily time critical. If they have enough retirement funds to consider purchasing an annuity, they might want to consider using some of their resources to purchase one from the SSA.
Rick, this is Ted Michalek, from NASA/GSFC. We worked on at least a couple of satellite projects together. A friend of mine who teaches financial subjects sent me a couple of your articles. I was looking for your email, but this is the best I’ve been able to find to contact you (maybe you can get my email from HD?). Hello, and good to see you appear to be doing well.
Ted, it’s great to hear from you. I fondly remember working with you. I hope you are well. I’ll reach out to Jonathan to get contact info.
Great, can’t wait to catch up with you.
Rick, as my wife and I transition toward retirement, some of the details are still a little fuzzy, except for the date I claim Social Security. As the higher earner, with no complicating circumstances like poor health or poverty, I’ll wait until age 70. Part-time work will help get me from here–age 63–to there, but my retirement savings will probably play a part as well. Mike Piper’s calculator indicates my wife should claim two years from now at age 62, and that will help. The “buy a SSA annuity” illustration turned a light on for me right away. I know you are aware that Wade Pfau has published some excellent research on this topic.
Edmund, Thanks for the comment. We are on a similar plan – my wife claimed at 65 after stopping work and I’m waiting to 70. When I first read the BC paper on considering delaying SS as buying annuity, it made sense to me. Based on a lot of the current posts and comments about the place of annuities in a retirement plan, I thought it would be interesting to raise this topic again, especially for someone considering purchasing an annuity to supplement their SS income. Obviously everyone’s circumstances are somewhat different, and clearly most people don’t delay until 70.
I’ve played around with a number of spreadsheets using my personal SS taxes and historic data to get a feel for how it works. My firm conclusion is that Mike Piper is a really smart person! Wade Pfau is also extremely smart. I was lucky to have him as a professor in my CFP and RICP curricula. But I find that many people aren’t comfortable with an analytical and a probability based approach.
The Piper calculator says this “The strategy that maximizes the total dollars you can be expected to receive over your lifetime is as follows”
Is that really the goal? I must admit I don’t get that as a valid goal. Is the accumulated benefits meaningful to the individual on a day to day basis?
Mike Piper’s calculator recommends that I file now at age 64 and then my husband file for his spousal benefit immediately thereafter, no matter how I manipulate our “termination” dates. As I described our financial situation in my comments on Mr. Quinn’s post about providing for a surviving spouse, my husband does not qualify for a SS benefit of his own. I was very tempted to follow this recommendation but haven’t pulled the trigger yet out of fear of being wrong. Thinking of delaying my SS as buying an annuity also has me thinking I should wait as we don’t need the income right now and hope to convert more funds to a Roth. Cue the hand wringing…
Agree. But Ive had any number of discussions with middle income folks who have the mentality of preserving their savings in retirement by taking SS at 62. Even when shown the math, its a hard sell. Another point is that if considering an annuity, delaying SS is more often than not, the best first choice. SS can be supplemented with a simple annuity for another guaranteed income stream. Having increased SS streams by delay plus an annuity can create the license to spend. Its been demonstrated by research that folks with guaranteed income streams spend more than those who do not (Finke and Blanchett).
This is an argument for educating more people on the value of a total portfolio approach. Getting people acclimated to thinking about everything as an asset and including it in asset allocation and long term planning. I suspect if people wait until they’re facing retirement it’s too late to teach as you’ve already settled in to your world view.
I took my SS at my FRA and my wife took her share of my SS (stay at home mom) 3 years early. (She’s 3 years younger). The breakeven point is somewhere near 83 for me if I waited unto 70. We decided chances are greater that we will want to spend the money when younger, as opposed to spending it in our mid ‘80’s. Maybe if the only income we had was SS we may have seen it differently though, because we both have longevity in the family. Fortunately we don’t need it so the decisions was easier and we’d rather help our kids now rather than after we are gone, so this money can help them.
My wife and I are in the middle of this right now. We have decided to delay my SS (I am the higher earner) until 70, and we started hers at 64 (about a year ago). We are spending down some accounts to tide us over until my SS starts. I look at SS at 70 as longevity insurance. My Dad is almost 92 and my Mother-in-law is approaching 91. My bet is at least one of us makes it to that point. I hate seeing money fly out of our accounts, but I am trusting the math.
I cant imagine NOT taking your SS at age 62. Just look at your break-even age. Just take it. Invest it if you don’t need it… Even if you did wait, the dollars you would be ahead by death would be somewhat unimpressive. Yes, for the few out there that will be in desperate need for SS to survive, please do wait.
I couldn’t agree more! We are 77 and 72 now. My husband, the lower earner, took his SS at 62–it is $1800 a month. When I reached my FRA I lucked out and was in the window that allowed me to talk half of his SS until I was 70, when I took my own. It is a whopping $4700 a month—if the world goes to hell in a hand-basket and I find myself alone? I could live on that.
We lived on his SS, my 1/2 of his and withdrawals from our investments after I quit work at 67.
Waiting also benefits my husband if he should outlive me. We feel very secure in our decisions around social security.
Our financial plan has my husband applying for SS at his Full Retirement Age (FRA), which is 66 yrs 7 months—right now!—and me waiting until I turn 70 (5.5 years from now).
Coincidentally, in a newsy email to me just this morning, a friend wrote the below about applying for SS. She turned 65 in late March (born in 1960, her FRA would be age 67, as is mine) and decided to apply just before her birthday this year. She shares the below experience, which made me wish we’d started my husband’s application process a few months ago, although I know having to wait yields a bonus not a penalty in terms of $$.
If it’s not too much, I’m curious if they applied via My Social Security online, used paper and mailed it in, went to an office to start the process. I have heard other stories that seem to rank things, mail in, in person, online as slowest to fastest.
I know that online you can even check your status.
Thanks Laura. It’s concerning that your friend is experiencing the delay. My wife applied for her SS and Medicare at 65 two years ago and everything happened flawlessly and quickly. Please let us know how your husband’s and friend’s application proceed.
Will gladly share those two real-time SS application stories as they progress.
I just applied for SS. I am 3 months away from 70, so I applied for my benefits to start in 3 months. I have to say it felf like a long wait – 8 years since I retired. I did the math and decided to buy an additional income annuity so my SS plus the annuity will cover all my annual/normal spending (at least for now). I did this because (1) I want long term simplicity, and (2) I want to be removed from investment anxiety caused by the market. So I have almost made it through the 8 years of living off my savings. It was difficult but I stuck to it. Now let’s see how I do with living off my new income.
Susanne, best of luck as you move into this phase of retirement.
I am currently writing an article for Benefits Quarterly recommending that 401k plans adopt SS deferral and RMD installments as the distribution default for individuals who commence 401k payout between the ages of 62 and 70 – regardless of what the plan’s withdrawal default is (typically a lump sum) where the participant commences payout prior to age 62 or after age 70.
The lump sum default is a holdover for many plans, harking back to pre- TRA’86 (10 year forward averaging), pre-SBJPA (5 year forward averaging) and pre-EGTRRA (liberalized rollovers/direct transfers).
With this default, when the individual approaches the plan to commence payout, they need not accept that income stream. And, because the default is in the form of installments, not insurance, the participant can change their mind at any time – stop, increase or reduce the payout amount. And, of course, the individual could commence Social Security at any time.
I could accept either monthly (electronic banking) or an annual (electronic transfer) in terms of the payment stream.
The default would be intensively communicated starting at age 50 on the individual’s 50th birthday with an illustration – to demonstrate just how (poorly) prepared the individual is in terms of income replacement if they commenced retirement at age 62. I envision a Social Security decision-making tool that would first identify the claiming age where the net present value is maximized, then positioning any further delay (to Social Security Full Retirement Age, or to age 70) as the equivalent of an annuity purchase – where the “annuity” is guaranteed, inflation-indexed income with a surviving spouse benefit.
The individual would be solicited no less frequently than annually to consider rolling over / directly transferring assets from other plans, and traditional IRAs – so that the subsequent year’s illustration on every subsequent birthday provides a more accurate representation of (un)preparedness.
This does not preclude addition of an in-plan, guaranteed income feature (an annuity, GMWB, etc.), but, because the installment payout doesn’t use any insurance contract, the default is not a fiduciary decision, but like the defaults that are part of automatic features (enrollment, escalation, and the decision to add a QDIA – not the selection of the QDIA), it is a settlor decision. Just as the selection of the traditional withdrawal default – a lump sum. That’s important for plan sponsors who are already being sued in litigation all around America.
If you would like to peer review the article, I would be happy to share. Jack
Jack, That sounds like an interesting article. I’ve often thought that 401k plans could offer better choices I’d be interested in reviewing it. Some of the terms might need to be defined if you want the casual reader to understand the article.
Thanks. Benefits Quarterly is a publication typically read by benefits weenies like me – a publication of the International Foundation of Employee Benefit Plans/International Society of Certified Employee Benefits Specialists.
With the SECURE 2.0 mandate that every new 401k plan include automatic features, most benefits professionals who have no experience with automatic features, defaults, etc. will be regularly (re)introduced to Behavioral Economics “nudges” or defaults.
Forgot to mention that the communications and marketing will suggest to individuals that they should examine the default, including deferral, where they need additional, inflation-indexed, guaranteed income to meet routine, everyday, periodic, anticipated expenses in retirement.
That is, like every other default, it isn’t right for everyone.
Write a version of the article for Humble Dollar, and aim it at general folks like me. That would be a service to us all.
Another discussion focused on annuities. I’ve considered one being a part of my financial toolbag, specifically for G. However SS has added another annuity of sorts. G worked in both private and public sector for many years and drew a pension in the public sector. She was ineligible for most of her SS benefit. However the “Social Security Fairness Act” alters the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). It seems that she will get that SS annuity after all. Her only decision remaining is to decide to wait until age 70, or not.
Norman, thanks for commenting. Your wife’s situation demonstrates how many variables there are with SS. The recent changes you reference add another wrinkle for some. It’s always interesting to see what the considerations are for individuals making the claiming choice. I think it’s important to think about what you are trying to accomplish before making a choice. Good luck
The changes also make the insolvency problems worse. We always seem quick to act, but as quickly discount the possible consequences.
Nothing quick about that change.
As we can see from the comments, there are many different reasons for the age to start SS benefits. Health, family status, when and how financial security is needed most and different goals for the money among them. All are valid for someone.
The one thing you don’t want to is blindly follow the experts to age 70. And who cares if we maximize our lifetime SS payout?
They know nothing about you and your circumstances. It’s like saying you need $1,000,000 to retire. Maybe yes, maybe no.
And you also don’t want to blindly start benefits at FRA, just when they would start to accelerate.
I would hope a person does nothing just based on what others say or do.
Still over half start their benefit before age 66 including 27% at age 62.
I’m guessing that is because people need the income or now-a-days people jump because they fear SS won’t be there for them. That is sad.
As I believe I have written before, we both took our Social Security as soon as we could.
We figured the kids could inherit our other financial assets (not our pensions either) but not the Social Security.
My personal financial goal now is to leave as much money as possible to the kids.
Or my wife if I go first.
If you delay Social Security, the higher benefit will allow you to take less from your portfolio, leaving more of that for your heirs if you live long enough.
…and if those inherited funds are converted to a Roth (the earlier the better) your heir(s) will be able to delay withdrawal after another 10 years of growth, all tax free.
Me too👌🏼
If SS makes up the vast majority of retirement income and there are little no other assets, I can understand the higher benefit with COLA concern.
However, don’t better planners have other investments that can deal with inflation beyond the additional adjustment related to the dollar difference between FRA and age 70?
The added cola value is only on the 21% or 24% portion on SS added from delaying. The FRA benefit still gets the COLA regardless.
Dick,
Your last statement is a bit confusing, but I think it ignores the compounding effect that the combination of yearly COLAs and delayed retirement credit (DRC) provide. When delaying, the COLA is applied to the primary insurance amount (PIA) each year until the person claims. Thus the benefit at 70 is the DRC times the inflated PIA at age of claiming. My FRA is 66 and 6 months, so 70 is 3.5 years of delay. If 2026 and 2027 have the same COLA as 2025 (2.5%) my PIA at 70 will be about 27% higher than at FRA. My DRC will be ~23.3%. Therefore the net benefit at 70 will be about 57% higher than at FRA. If I project my FRA benefit to 70 using the same COLAs, my age 70 benefit would be some 31% higher than the FRA benefit simply inflated.
Even those who claim at 62 get the COLA so there is nothing magical about claiming at one’s FRA.
Jonathan, Bill Bernstein and many other highly knowlegable investment experts strongly recommend waiting until 70 to claim unless there are compelling reasons to claim earlier.
My wife and I both waited until 70 and our combined gross SS benefit is $101,868 this year, which is $24,695 (32%) more than it would be if we had claimed at our FRAs (66). And, that difference will continue to increase with each positive COLA. That difference also applies to the 15% of our SS income that isn’t taxable.
How will the difference increase when both amounts are subject to the same COLA?
For simplicity assume Person A has a $1000 SS benefit and Person B has a $2000 benefit. Assume inflation is steady at 5% for bother people. The benefits grows like this. The difference grows
Year Person A Person B Difference
1 $1,000 $2,000 $1,000
2 $1,050 $2,100 $1,050
3 $1,103 $2,205 $1,103
4 $1,158 $2,315 $1,158
5 $1,216 $2,431 $1,216
If the example doesn’t convince you, here is the algebraic derivation.
X = 1ST Person SS Benefit
Y = 2ND Person SS Benefit
r =inflation rate
n = number of years
D = difference between benefits
D = X-Y
D in any year n is designated D(n)
D(n) = [X*(1+r)^n] – [Y*(1+r)^n]
Where [(1+r)^n] is the inflation factor in any year n
Factoring this out results in
D(n) = [X-Y] * [(1+r)^n]
Demonstrating that the difference in benefits increases by the inflation factor [(1+r)^n]
Q.E.D.
I yield to an engineer. I see the light. I think I may have heard the words “algebraic derivation” once in my life somewhere around 10th grade.
Your X Y’s have brought back bad memories, Rick😱
When two different dollar amounts increase by the same percent, the difference between them in dollars will increase each year.
When I retired at age 66, I was undecided as to whether to delay SS or not. I had the resources to do so, but my analysis showed breakeven at age 82. No male in my family had lived past 73. I was in decent health but on the fence since 82 was a long way off.
When I called SS, the lady encouraged me to sign up now and I did. I am 80 and still in pretty good health. That SS decision is looking worse every day. Especially since my pension has only had one 1% COLA in 15 years.
I cannot complain because we are in good shape financially, but I feel like we may have left some money on the table.
I don’t know if this applies to you but, a reason I’m waiting until 70 to claim is that my spouse’s SS payment will be a lot less than mine. Therefore, if I die before her, her survivor benefit, based on my payment, will be higher than otherwise.
Jerry, I made the same decision for the same reason. My breakeven, which my accountant helped me calculate, was 83. As a cancer survivor and type 1 diabetic (and the first male in my family to reach 60), I decided that I wanted the money at 66 to ensure that my new mortgage and utility bills were automatically covered every month, and to ease any stress over the up-and-down nature of my consulting income. If I live into my late 80s, I’ll end up leaving some money on the table, but I’ll never regret my decision. Peace of mind is priceless.
If the money at 66 met your stated needs, no regrets. So called break even is irrelevant. You didn’t leave money on the table, you took what you needed when you needed it most.
At the ripe young age of 54—and nowhere near making a final decision about Social Security or buying an annuity—my mantra is simple: different strokes for different folks.
Sure, annuities offer income security and freedom from market volatility, which many find comforting. But me? I fire up my financial calculator and feel empowered to scream: Not for me! It’s not even the fees or surrender charges that bother me—it’s the consistently lackluster returns that fail to keep pace with the markets.
Yes, I know annuity advocates will roll their eyes, convinced I don’t understand. But here’s the rub: those who can afford a good annuity probably don’t need one—they’re already positioned to weather market storms (even if it takes a bottle of antacids). Meanwhile, those who truly need income guarantees lose a lot of flexibility once they commit their funds. Sure, they get a paycheck—but face challenges when a big, unexpected expense (like a roof replacement) hits.
And then there’s the middle ground—people like many of us—where small personal circumstances tip the scale one way or the other. It’s not a one-size-fits-all decision, and it shouldn’t be.
As for Social Security, I might delay a bit—but not for the usual reasons. I’m thinking more about tax optimization than maximizing my check. No way am I waiting until 70. And I probably won’t claim at 62 either, especially if I’m still working (even in a reduced role). I’m not chasing a bigger check in my 70s—I want to enjoy those dollars while I can still climb castle stairs in Europe or survive a 30-day cruise without needing a nap between buffets.
It’s not either or. Buying an annuity does not mean using all your assets. You can still allow for the emergency funds flexibility. Don’t look at it as an investment except in peace of mind.
You may feel differently with the reality of living the rest of your life on whatever income stream you choose.
The “I’ll take Social Security early because that’s when I’ll enjoy the money the most” argument, I believe, confuses a lifestyle decision with an investment decision. Imagine you have $500k in savings and $500k in future Social Security benefits. You could get part of that $500k Social Security benefit sooner by claiming benefits early or get more later by delaying to get a larger monthly check.
To fund those early retirement travel dreams, you could dip into the $500k in savings or you could claim Social Security early. Either will provide you with the necessary money. But which is the smarter financial decision? The answer will depend on individual circumstances, but lots of experts would argue for delaying benefits. But whatever you choose, it shouldn’t be driven by your spending desires.
HI Jonathan,
I am humbled that you read and even commented on my post, thank you! Some of the post was written tongue in cheek and I hope it came across as such. I do believe claiming early is not as bad a strategy as many make it out to be. This is easy to say when you’re 54 and still working, I leave myself open to changing my mind in the future though 🙂 .
I have considered the opportunity cost of leaving that money with SS vs the larger payout and getting to the break even point as a non starter. I want to leave assets to my heirs even if they won’t need it. Leaving my Roth accounts grow larger while using SS $ for day to day expenses helps me do that. Finally, for a theoretical payout of say $2200 taking it early vs $3100, 6 years later, I prefer the $2200 now when I am younger and can get more ‘benefit and enjoyment; from those dollars. it is just worth less to me as I get older. I reserve the right to change my mind.
Rick, given the percentage of retirees who depend solely or mostly on SS income, I don’t think delaying is an option for most. That means to me delaying says other resources must be used in the meantime.
I find it interesting that when I wrote about annuities there was pushback based on keeping and investing the money rather than buying an annuity. Here we are saying give up 3-4 years of cash, take the risk of living to age seventy and beyond, get a higher monthly payment, but actuarially gain nothing in total.
As I have written before I did the opposite, I took the SS cash for myself and Connie at FRA and invested our SS benefits for several years. That started 17 years ago while I was still working part-time.
Being ultra conservative it’s all invested in muni mutual funds of different duration. Today those funds have over $400,000 in them as all interest has been reinvested and they generate about $1,600 monthly in tax free interest. Needless to say, more aggressive investing should yield more.
But my point is that we have both the cash and extra income when needed. The income is not that far from my net monthly benefit on a taxable equivalent basis.
Seems like both approaches have different risks and benefits. We don’t, however, rely on SS for a major portion of retirement income.
I agree with most if not all of what you write. I cannot see giving up three years of cash in exchange for a higher payment which only breaks even after x number of years. The larger check in the future is just not as valuable to me and when I pass on SS payments stop. The funds I used while waiting for the opportunity to earn the larger check cannot be left to pass on. yes, there is risk, markets could tank, but I am ok for now with that.
My feelings exactly, Mike.
I thought my last paragraph covered your comments. I apologize if it wasn’t clear. I acknowledged that people in “desperate financial situations” may need to take their benefits as soon as possible, I’ve spoken to dozens of them over the last 7 years of TaxAide.
I also wrote that those who don’t need their SS benefits can do whatever they choose. It makes little difference.
Like you I have a pension and am glad of it. I have never pushed back on the idea of using annuities to secure guaranteed retirement income.
But focusing on the two extremes ignores a large swath of retirees who have both SS and some level of retirement savings. They have to make decisions on how to best generate income. They could likely benefit from an annuity to help secure a safe level of income.
The real point of the CRR analysis is that if someone were considering purchasing an annuity, they should look at the option of delaying SS as a way of buying one of the best annuities on the market. If you are in favor of recommending that a retiree take a chunk of their retirement savings to purchase a commercial annuity, you should understand that using funds to bridge to SS is the same thing, except you are getting a better, inflation adjusted annuity.
To me it all boils down to a risk. Delaying SS has a risk you will live to enjoy it. That risk may be complicated by having a surviving spouse or not and the age of the spouse. That is the relative value of the higher benefit.
I could have delayed and had the higher benefit, but Connie is 4.5 years older than I am. So, we are about actuarially neutral, thus limited survivor value for a higher benefit.
Our income is lower, but now there are significant assets to pass to our children.
A single person may face a different situation or one with a younger spouse where the higher SS life annuity has greater potential value.
I really don’t care whether I “live to enjoy it”. The higher payout gives me more peace of mind.
Agree. I won’t care if I don’t break even if I’m six feet under. It’s all about protecting finances IF I lead a long life.
Same. It’s right there in the name. “Security.”
Exactly. I wanted not only the 8% increases, but the largest possible base for future COLAs. I was helped by a spousal benefit after FRA – good thing the divorce didn’t go through a couple of months earlier!
Rick, this is exactly how I looked at waiting until age 70. An 8% increase each year I waited to claim, with a COLA to boot seemed like a no-brainer to me. In my case, the resource I used to bridge the gap was my cushy job as a tax preparer.
Rick, you make an important point: If you want more lifetime income to carry you through retirement, your top priority — ahead of purchasing an income annuity from an insurance company — should be to delay Social Security to get the largest possible monthly check. It is indeed the best annuity you can buy.
Thanks Jonathan. I hope people understand that one activity doesn’t preclude the other. You can delay SS to get the benefit, and purchase a commercial annuity to fill your income needs.
Amen!!!
Good thoughts; thanks. I really like the idea of characterizing the decision to wait to start social security as “buying an annuity”. When you roll in the COLA aspect it’s hard to beat. Of course, as you point out the folks who need it the most are probably not able to wait. Remember that old quote about “spending money to make money”. This is a perfect example.
Thanks. I wish I could take credit but the it was BC’s CRR that deserves the credit for framing this decision as buying an annuity.