Weighing the Retirement Tradeoffs

Effective planning for your future requires making a series of key decisions.

Federal employees must make many decisions when planning for retirement. Among the most critical are:

  • Deciding when to retire
  • Choosing how to invest retirement savings 
  • Evaluating the various ways to withdraw income from retirement savings
  • Determining when to claim Social Security retirement benefits

All of these decisions have a financial impact on your retirement years. For married couples (as well as for those who are providing financially for someone else in retirement), survivor benefit elections and life insurance considerations also can impact not only your future, but that of your dependents. 

A major consideration that complicates retirement decisions is the concept of longevity risk, which involves trying to quantify the income you will need to finance your retirement, taking into account how long you might live, changes in prices and the need for varying amounts of cash flow at different stages of your life.

According to The Hamilton Project, an economic policy initiative at the Brookings Institution, in 1965, there was a 10% chance of a 65-year-old man living to age 90 and a 25% chance that a 65-year-old woman would live that long. By 2015, those chances had increased to 22% and 34%, respectively. According to the Census Bureau, life expectancy for the total population is projected to increase from 79.7 in 2017 to 85.6 by 2060.

Why is it important to consider life expectancy when planning your retirement? Because you’ll need enough retirement income to last whether your retirement continues for nine years or thirty-nine years. If you knew you only had to finance a few years of retirement, it would be easy to plan. But when your life after retirement could last longer than your career, you need a strategy.

In crafting such a strategy, it’s good to be able to count on some income that will last your whole life, such as Social Security retirement benefits and an annuity under the Civil Service Retirement System or the Federal Employees Retirement System. 

Recently, a panel of experts from the Bipartisan Policy Center, AARP, and the Urban Institute, along with a former deputy commissioner of the Social Security Administration, held a discussion about a recent BPC report, How to Help Americans Claim Social Security at the Right Age.  Their conclusion was that most people aren’t provided the right information to help them make an informed decision on the optimum time to claim their benefits. I’ve found this is true not only for Social Security, but for many other important decisions that must be made to plan for a secure retirement. 

Jason Fichtner, former deputy commissioner of Social Security, said some people think they should claim their benefits early to get the most money in benefits. But this assumption doesn’t take into consideration the tradeoffs that should be considered when deciding whether to claim benefits at age 62 (or when you stop working after 62) vs. waiting until your full retirement age—or even delaying benefits until you’re 70.

Weighing these tradeoffs involves considering the following:

  • Social Security provides insurance against the loss of income due to retirement. Are you going to fully retire, or continue to have earned income? In the latter case, you may buy yourself some time to delay claiming. Most people who delay taking benefits have also delayed retirement beyond age 62. 
  • Social Security provides lifetime protection, meaning that the benefits never run out and they are protected against losing value as they are adjusted by cost of living adjustments.
  • Do you need money today or do you have other resources? If you have other retirement savings, you can draw on them for a few years to allow delayed retirement credits to permanently increase your Social Security benefit. If you’re married, this can also affect your spouse, since delayed credits are included in the widow’s benefit.

Waiting until age 70 to file instead of filing at age 62 makes a 76% difference in the benefit amount. For example, if your full benefit amount at age 66 is $2,000 per month and you file at 62, the benefit would be reduced to $1,500. But if you delay claiming the benefit until you turn 70, the amount would increase to $2,640 a month. This doesn’t take into account cost of living adjustments that begin to accrue at age 62 whether or not you file at that age. It also doesn’t factor in the wages you could earn if you kept working beyond age 62. 

Filing early isn’t like getting early entrance to a Disney theme park before the crowds come. The early bird doesn’t get the worm. If you claim your Social Security benefit early, you’ll pay a penalty in terms of a reduced monthly payout for the rest of your life.