Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.

How to Get the Most from Your Social Security Benefit

ARCHIVES
chuckstock/Shutterstock.com

Last week we explored the benefits and disadvantages of purchasing an annuity using the proceeds of your Thrift Savings Plan. This week, I’d like to consider another another question. Steven A. Sass, program director of the Financial Security Project, an initiative of the Center for Retirement Research at Boston College, puts it this way in a briefing paper: “Should You Buy an Annuity From Social Security?

In the paper, Sass describes the three traditional methods of receiving income from retirement savings: investing the principal in bank deposits or U.S. Treasury bills to preserve savings and live on the interest; investing in stocks and bonds and drawing out a portion as income; or buying an annuity. A fourth option, suggests Sass, is to delay claiming Social Security retirement income until age 70 and use your retirement savings to provide the income needed during the earlier years.

Social Security retirement benefits can be claimed anytime between the ages of 62 and 70. The full retirement age for someone who is 62 in 2014 is 66. That means, for example, that if your full benefit would be $2,000 per month at age 66, but you choose to claim the benefit at 62, it would be reduced by 25 percent, to $1,500. On the other hand, if you delay claiming the benefit until you’re 70, it would be increased by 32 percent, to $2,640.

Once a Social Security retirement benefit is claimed, it is in effect a life annuity that is fully indexed to inflation and provides a built-in spousal benefit. Sass says using retirement savings to compensate for the delayed Social Security benefit is the price you pay to purchase a larger annuity from Social Security.

Consider the example above: Delaying the Social Security benefit increases its value by 8 percent per year. At age 67, it would be $2,160 a month, or $25,920 a year -- a boost of $1,920. A retiree could use $25,920 from savings in order to buy the one-year delay in Social Security retirement. In other words, the $25,920 would be the price of the extra $1,920 per year in benefits. The annuity rate -- the additional annuity income as a percentage of the purchase price -- would be 7.4 percent.

The increase in Social Security retirement benefits is based on an actuarial determination. Suppose Bob claims his benefit at 62 at $1,500 per month and Jane claims hers at 70 at $2,640 per month. If they both die at age 81, they will have received roughly the same amount of benefits. (Bob will have received $342,000 and Jane $348,480). I’ve ignored cost-of-living adjustments in this calculation in the interest of simplifying it, but Social Security would provide annual COLAs to both Bob and Jane’s benefit from age 62, even if Jane delays her benefit until she’s 70.

Sass notes that in contrast to Social Security benefits, commercial annuities can’t be “actuarially fair.” Insurance companies have expenses such as marketing, management and risk-bearing costs that must be added to the actuarial price of the annuity. Also Social Security benefits are based on the life expectancy of the average American. Individuals who typically purchase commercial annuities generally have above average life expectancy. This is because the only chance of getting your money back from the cost of an annuity purchase is to outlive your life expectancy.

According to Sass, “buying an annuity” from Social Security, especially in today’s low interest rate environment, is the best deal in town. I would add that if you’re still working, then you could also delay receiving Social Security without tapping your retirement savings at all.

Here’s the bottom line: If you’re covered under the Federal Employees Retirement System and can live off of income from your retirement benefit and savings (without tapping the proceeds of your TSP account), then delaying Social Security to age 70 is probably worth it. Unfortunately, knowing just how long you’ll live is the best indication of when you should claim your Social Security benefit. Social Security actually provides a life expectancy calculator to help you, but of course there are no guarantees.

If you want to explore these issues further, I will be partnering again with Micah Shilanski for a new three-week webinar series on the “Seven Secrets of Social Security.” The series will begin Aug. 14 and registration will open soon.

(Image via chuckstock/Shutterstock.com)

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at www.tammyflanagan.com and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Forecasting Cloud's Future

    Conversations with Federal, State, and Local Technology Leaders on Cloud-Driven Digital Transformation

    Download
  • The Big Data Campaign Trail

    With everyone so focused on security following recent breaches at federal, state and local government and education institutions, there has been little emphasis on the need for better operations. This report breaks down some of the biggest operational challenges in IT management and provides insight into how agencies and leaders can successfully solve some of the biggest lingering government IT issues.

    Download
  • Communicating Innovation in Federal Government

    Federal Government spending on ‘obsolete technology’ continues to increase. Supporting the twin pillars of improved digital service delivery for citizens on the one hand, and the increasingly optimized and flexible working practices for federal employees on the other, are neither easy nor inexpensive tasks. This whitepaper explores how federal agencies can leverage the value of existing agency technology assets while offering IT leaders the ability to implement the kind of employee productivity, citizen service improvements and security demanded by federal oversight.

    Download
  • IT Transformation Trends: Flash Storage as a Strategic IT Asset

    MIT Technology Review: Flash Storage As a Strategic IT Asset For the first time in decades, IT leaders now consider all-flash storage as a strategic IT asset. IT has become a new operating model that enables self-service with high performance, density and resiliency. It also offers the self-service agility of the public cloud combined with the security, performance, and cost-effectiveness of a private cloud. Download this MIT Technology Review paper to learn more about how all-flash storage is transforming the data center.

    Download
  • Ongoing Efforts in Veterans Health Care Modernization

    This report discusses the current state of veterans health care

    Download

When you download a report, your information may be shared with the underwriters of that document.