What I Told My Dad About Social Security

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Dear Rich Lifer,

It’s been a few weeks since the Paradigm Shift Summit went down in New York, and I’ve already covered a few of the many ideas and concepts I shared at that awesome event.

But there’s one I haven’t yet touched on… and it started with a question from one of the audience members.

The Set Up

I had just finished outlining how several of my favorite Social Security strategies were no longer available because lawmakers had shut them down.

Indeed, I have strong reason to believe that these various “loopholes” were closed precisely because I (and a handful of other people) popularized them in articles and letters that went out to hundreds of thousands of retirees.

My own parents got in before it was too late and I estimate they’ll grab an extra $100,000 or two out of the system because they were able to act.

Based on the feedback I’ve received over the years, plenty of other readers benefited from that information as well.

Of course, that’s no consolation to anyone considering their options these days.

Which brings me to the audience member’s question…

The Shot

“Are there still any good Social Security tricks available now?”

The answer is yes.

And one of them is completely obvious though roughly 96% of Americans do not take advantage of it.

That trick is delaying benefits until age 70.

Why would I possibly recommend this? Especially since I spend a lot of time criticizing the Social Security program?

It’s simple: While I continue to believe that our national retirement system is riddled with problems, I am also a pragmatist.

This is why, in addition to recommending other tactics that are no longer available, I advised my own father to delay taking his Social Security benefits until age 70 if possible. (Which he did.)

See, I consider Social Security to be the best fixed immediate annuity currently available.

The Smoking Gun

Remember, annuities are basically life insurance policies in reverse.

In their simplest form, you pay money upfront and then start collecting monthly fixed payments for as long as you live.

Die early, and you “lose.” Live for a long time, and you may make more than you paid up front.

The same basic principle is at work when it comes to delaying your Social Security benefits.

If anything, Social Security differs from the typical private fixed annuity because it is based on a MUCH LESS AGGRESSIVE actuarial table.

And while I always get a lot of feedback on the issue of future inflation and the overall “time value” of the money you receive from Social Security, don’t forget that Social Security does contain an inflation adjustment — as flawed as that adjustment may be.

This is something that many private annuities DON’T have.

The Fallout

So here’s an example of how delaying your Social Security benefits might work in the real world:

Scenario #1. You are able to collect $12,000 a year from Social Security at age 65.

Scenario #2. You wait an extra year and start collecting $12,680.

Just for delaying 12 months, you will now earn an extra $680 annually for the rest of your life. And your “cost” for doing so was $12,000.

To arrive at your annual interest rate, or “return on investment,” you simply divide the $680 annual payment by the initial $12,000 you “spent.”

What you’ll come up with is an annual rate of 7.1%!

To be clear, I am merely saying that by forgoing $12,000 for that one year of benefits, you are now going to receive an extra $680 a year for every additional year you live.

Now I know there are a lot of “ifs” involved. So, yes, it’s a gamble. Just about every investment decision or insurance contract is.

And obviously, if you need the money to live on then just start taking your benefits as soon as you can.

But from a mathematical standpoint, it might make sense to delay collecting — especially given the fact that interest rates remain far lower than historical norms.

If you have “longevity genes” in your family, the idea only becomes more compelling.

And that’s just based on the simple analysis.

The Resolution

There are additional reasons to favor Social Security over a regular annuity.

First, if you worked during that extra year of delaying, it’s quite possible you would have FURTHER increased your future payments because your earnings record would have also gone up.

Second, these “annuity” payments currently get favorable tax treatment in many cases, and it’s entirely possible you would get further tax benefits by delaying that extra year.

Third, Social Security’s built-in survivor benefit might also make delaying for the additional income all the more attractive to couples.

That last point is especially critical because I also told my mother to begin collecting her benefits at an earlier point than my father.

In doing so, she started getting immediate income … but also retained the ability to step up to my father’s higher benefit if she ends up widowed at any point.

So if you’ve been thinking about purchasing an annuity and you haven’t yet filed for Social Security, take a little time to work out all the pros and cons of various strategies before you make a final decision.

To a richer life,

Nilus Mattive

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