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Social Security hedges your bet

By Jennie L. Phipps · Bankrate.com
Wednesday, March 19, 2014
Posted: 3 pm ET

Every time I write about the wisdom of postponing a Social Security claim, I get a barrage of comments from people who disagree with that approach. They believe strongly that delaying a Social Security claim past age 62 means leaving money on the table. For instance, JRyder writes:

"I do not see how the math works to a great advantage in waiting. ... I will be 78 years old before I receive more (than I would get by taking Social Security at age 62). ... Why one needs more money going on 90 than at age 62 is a mystery."

The Center for Retirement Research at Boston College studied attitudes like those of Ryder and concluded that even though life expectancy at 65 has increased an average of four years since 1980 -- to 84 for men and 86 for women -- some workers remain pessimistic about their own personal longevity. This leads them to retire earlier and to claim Social Security earlier than those who think they have a very good chance of living long lives.

Guessing at life expectancy

People with the lowest one-third of "subjective life expectancy" thought they had, on average, a 37 percent chance of living to age 75 and only a 21 percent chance of living to age 85. People with the highest one-third of "subjective life expectancy" believed that they had a 94 percent chance of living to age 75 and a 70 percent chance of reaching age 85. Researchers found that these guesses had valid thinking behind them. There was a correlation between how long the parents of those surveyed lived and the circumstances under which they died, and the survey group members' predictions of their own life spans.

What does this boil down to? Matthew Rutledge, a research economist at the center and one of the authors of the study, says basing your retirement planning on your expectations of how long you'll live makes some sense to him: "People want to maximize what they are going to get. If you expect to die at 72 or 75, then it makes sense to claim early. Otherwise, you're just leaving your money for somebody else to get."

What if your guesses are wrong?

But since estimating longevity is such an inexact science, Rutledge thinks that for many people, there are smarter ways to look at this. Social Security can be a fine hedge against outliving your money. "Delaying your claim is insurance against the possibility that you are wrong," he says.

"Don’t claim Social Security at 62. Instead, use some of your other wealth -- tap your 401(k). In the event that you are wrong and you live a long life, you'll still have Social Security to rely on -- a lifetime annuity that is better than anything that you can buy."

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