Sunday, July 15, 2007

Delaying starting Social Security Benefits One Year

Scott Burns has an excellent article on his Asset Builder site where he discusses that for him as part of a married couple, delaying the beginning of Social Security benefits will result in an increased monthly payment. And that to buy an equivalent inflation-adjusted joint-and-survivor life annuity on the open market equal to the increase in monthly payment would cost much more than the Social Security benefits he lost during the one-year waiting period.

A little background for those unfamiliar with some of the concepts. Social Security benefits based on your earnings increase the longer you delay the commencement of benefits, up to the age of 70. Someone whose Normal Retirement Age is 66 will receive a monthly benefit that's 8% higher if he waits until the age of 67 to start benefits. Also, Social Security benefits also are increased with inflation. A lifetime annuity is one which is purchased with an initial contribution, and then the annuitant receives a monthly payment for his lifetime. Some annuities are offered with options, such as return of principal, that are not equivalent to Social Security. One option that is equivalent to Social Security is joint-and-survivor life. The annuity can be structured to pay a certain amount to the annuitant, and if he dies then all or a portion will be paid for the lifetime of his survivor (named at the purchase of the annuity). Under Social Security, when one of a married couple dies, the survivor continues to receive the larger of the two Social Security checks (unless the Government Pension Offset provision applies).

Let's consider a married couple, in which the wife has earned a Social Security benefit equal to 50% of her husband's. She can draw a benefit based on her own earnings, when her husband retires they also receive his benefits. If the husband dies, the widow no longer receives her own benefit but continues to receive her husbands. If the wife was a stay-at-home mom and has no benefit based on her own earnings but will also receive spousal benefits of up to 50% of her husband's benefit, depending on her age of retirement. However, spousal benefits can't start until her husband also draws his Social Security. In either of these two cases, the widow's benefit is equivalent to her continuing to draw her own benefits plus 50% of her husband's.

In the table below, I have some figures as to the monthly check from an annuity or Social Security benefits not taken during a waiting period. For example, a value of 0.005 would mean that for an annuity contribution of $100,000 a monthly check of $500 would be paid that would be adjusted upward for inflation. Social Security values are for those whose Normal Retirement Age is 66. Annuity values are obtained from Vanguard's web site, see Scott's site for a link.

Monthly return from annuity principal
Age SS Male Female Joint
62.00 0.005556 0.004747 0.004320 0.004224
62.92 0.005236 0.004892 0.004439 0.004336
63.00 0.006944 0.004905 0.004450 0.004346
64.00 0.006410 0.005064 0.004580 0.004469
65.00 0.005952 0.005222 0.004710 0.004591
65.92 0.005585 0.005367 0.004830 0.004704
66.00 0.006667 0.005380 0.004840 0.004714
67.00 0.006173 0.005588 0.005014 0.004874
68.00 0.005747 0.005796 0.005187 0.005034
69.00 0.005376 0.006004 0.005361 0.005194
70.00 0.005051 0.006211 0.005534 0.005354

The return for delayed Social Security varies because of the formula used to compute benefits. For example waiting from age 66 to 67 increases benefits by 8%, but waiting from age 69 to 70 increases benefits only 6.45%. This is not actuarially correct since 1 year is a higher portion of your remaining life expectancy the older you get.

As a single male, the spousal aspects of Social Security do not effect me, and there fore my payments under an annuity are 12-15% higher than they would be if I provided a 50% survivor's benefit to a wife of the same age. Therefore, the advantage to me for delaying Social Security is less than for a married man. Even so, I come out ahead up until the age of 68, after which I come out ahead because of the actuarially incorrect computation of Social Security.

For a single female, the advantage for delaying benefits is extended to the age of 69. That's because an annuity payments are lower to a female, not because of male chauvanism but rather because a female has a longer life expectancy.

For a joint-and-survivor annuity with the wife getting 50%, the payments are slightly below that of a single female, so the advantage for delaying benefits also ends at about age 69. This assumes that the wife is exactly the same age as the husband. The payments will be decreased for a younger wife, with greater reductions for a greater difference in ages. Also to be considered is whether the wife has a benefit based on her own earnings that's higher than the spousal benefit. In that case, the survivor's benefit is less than 50% so an annuity payment would be higher than that in the table, and the advantage for delaying benefits decreases.

For a couple with a stay-at-home wife, the advantages for delaying benefits are the same as a single male up until the wife reaches her Normal Retirement Age. After that, any disadvantage quickly disappears because spousal benefits are not increased for waiting beyond Normal Retirement age -- but they are decreased for taking benefits before the Normal Retirement age.

Hopefully this along with Scott Burn's article will provide some food for thought. I urge you to learn more about how your benefits are computed from the Social Security Administration web site, the links on Scott's article, and some study of your own situation. There are other factors to consider, such as whether your Normal Retirement age is close to 65 or to 67.