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Social Security ‘the best deal’

By Jennie L. Phipps · Bankrate.com
Thursday, May 31, 2012
Posted: 1 pm ET

Waiting to claim Social Security is the "best deal in town," analysts say in a new research brief from the Center for Retirement Research at Boston College.

The researchers looked at four retirement planning options for people who hope to live off their savings in retirement. Here are their conclusions:

Live off interest. If you preserve the principal in something very safe, such as U.S. Treasury bonds, and live only on the guaranteed return, you're going to need lots of savings. Even so, your income is likely to be Spartan. Over the period since 1926, U.S. Treasury bills returned just 0.75 percent above inflation. At 0.75 percent, $100,000 in savings would provide an income of $750 a year. If you'd saved $1 million, you'd still have only $7,500 a year in income. The kibble I buy for my dog costs more than that.

Invest in stocks and bonds and live off the income. Researchers use recent calculations about "safe" withdrawal strategies to conclude that a  couple in their mid-60s could draw out about 3 percent of their initial savings that have been invested one-third in stocks and two-thirds in bond mutual funds without being concerned that they will outlive their money. This approach would provide a couple with $100,000 in savings an income of $3,000 a year. With $1 million in savings, they could safely pull off $30,000 a year, in both cases increasing annually by the inflation rate. Not a princely sum, but getting closer to a living wage.

Invest in a commercial annuity. If this couple took their $100,000 and bought an immediate annuity at the going return of 3.7 percent, they'd receive $3,700 a year or $37,000 a year if they bought a $1 million annuity. Getting closer.

Delay taking Social Security. Social Security increases about 8 percent every year you delay taking it. Here are the numbers for people born after 1943:

  • Age 62: You’ll get 75 percent of your retirement benefit.
  • Age 63:  80 percent.
  • Age 64: 86.7 percent.
  • Age 65: 93.3 percent.
  • Age 66: 100 percent.
  • Age 67: 108 percent.
  • Age 68: 116 percent.
  • Age 69: 124 percent.
  • Age 70: 132 percent.

The center's researchers say that if you live off your $100,000 in savings in order to afford to delay retirement, you'll come out ahead. The center offers this example: "Consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66 -- $860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate -- the additional annuity income as a percent of the purchase price – would be 6.7 percent ."

And don't forget that Social Security offers inflation protection as well. A return on investment of 6.7 percent plus 3 percent in inflation protection is why the center calls delaying taking Social Security "the best deal in town."

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1 Comment
David Turner
June 02, 2012 at 9:57 pm

Is the .75 percent the total return or just the amount above inflation? For total cash flow return shouldn't you also add the inflation rate to the "real" rate of the T-bill?