I recently read an article called “When Retiring Early is not a Choice.” The first section of the article discussed the trade-off of deferring Social Security benefits to as late as possible versus taking them early, stating that:
To really come out ahead from delaying Social Security requires a client to live into their 80s; otherwise, they would generally better off taking a reduced benefit earlier and collecting for as long as they live.
There are two points I would make here:
- There’s a lot of debate as to whether it’s a good deal to get a 32% higher benefit if you delay from 66 to 70. To the lay person, that may seem like a great deal. However, if you analyze it using actuarial tables, you find that the Social Security system is essentially paying you 4% on the money you deferred. In this environment, that’s an okay rate of return. But in a higher interest rate market, a greater increase might be justified. In other words, you might do better taking the money early and investing it yourself.
- Besides the financial tradeoff, there are individuals who need the money simply to retire. This is where considering alternative saving sources that you might tap works well, like using the equity in your home to supplement your retirement income.
In an earlier blog post, I suggested that there ought to be a universal IRA offered by the federal government.
This article from CBS News talks about states coming up with programs to promote and encourage savings. Their hope is to prod reluctant retirement savers to start planning for their retirement income.
While laudatory, it’s critically important that individuals see these plans as accumulating future income rather than just savings.
These federal and state plans must encourage people to participate by making it a default election, or foster greater participation in other smart income choices.