Staging Retirement Benefits – Some Comparisons for the New Age of Retirement

In my Op-ed published on December 8 by Bloomberg News (at ), I suggested that the Social Security System could be made financially stronger while giving Social Security beneficiaries more choices about how and when their benefits are distributed.

One of the questions I received was that if so few beneficiaries elect to defer their payments today, why do you expect them to stage their elections under your reform proposal?

First, there’s a big difference between deferring 100% of your Social Security benefit payments than staging your elections. The 100% election is an old view of retirement that occurs at a fixed point in time. Staging is the new view where retirement itself might be gradual, as well as how one’s Social Security benefits are paid out.

Set out below is a comparison between the traditional approach of electing 100% of the Social Security benefit of say $2,000 per month at age 65 vs. staging the timing as to when Social Security benefits commence. Note in this example, after six years the staged benefit exceeds the benefit elected upfront. In both approaches, we’ve assumed cost of living increases of 3% per year. By age 75 the staged payments are 20% higher than the payments elected upfront.
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There are numerous ways to fill in the income gap between the budgeted amount of essential expenses and the staged Social Security payments. It could be from part-time work, income from a spouse or a drawdown from personal savings. Let’s explore the third option.

Assume that the individual has $200,000 in personal retirement savings, not including any home equity, cash or money market savings, or any funds dedicated for a special purpose. These savings constitute the “Investment Account” in this discussion – a “Social Security Privatized Account” is not proposed.

While objectives may differ, most individuals will want to achieve the highest level of retirement income with the least amount of risk. The risk is that the retiree runs out of money later in life, and has to cut back on essential living expenses.

In this example, the individual figures he needs $2,600 per month for his essential expenses – or 30% more than his regular Social Security check. If he elects Social Security upfront he must make up the difference (plus cost of living increases) out of his Investment Account for the rest of his life. If he elects to stage the election of Social Security over a 10 year period he can secure nearly the full amount of expenses, leaving a much smaller amount to be withdrawn each year from his Investment Account.

The chart below assumes the Investment Account is invested in Treasury securities earning the same long term interest rate of 4% underlying the calculation of the staged Social Security payments. (The example assumes the individual is in the 15% marginal Federal tax bracket.) Under the staged approach the Investment Account at age 85 is $120,291 vs. $99,671 under the upfront approach.
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If we assume that the individual invests more conservatively in short term investments and earns just 2%, the staged election holds up and the upfront election runs out of money at age 88.
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Bottom line: The staged approach may represent a lower risk strategy for the Social Security beneficiary, and in the end may create a greater Investment Account later in life. Staging benefits is likely a better fit for the new age of retirement that eases individuals into full retirement at a later age.

Finally, under the reform proposal, staging is simply another option available to beneficiaries, and not a substitute for the options available today.

Jerry Golden
advocating sound Social Security reform…