Steve Vernon wrote an article for CBS Moneywatch offering advice on “How to hike your guaranteed lifetime retirement income.” He researched this topic with Wade Pfau and Joe Tomlinson in a study from the Stanford Center for Longevity (SCL) and the Society of Acutaries (SOA). Perhaps the biggest concern in retirement is running out of money before you die. None of us know exactly how long we will live, so we essentially have to guess whether we’ll have to finance our retirement through age 75, 90 or past age 100. It’s important to have a source of guaranteed retirement income when you are planning for retirement.
There are three ways to get a lifetime income stream, some of which you have more control of than others. Social Security, pension income and annuities are the three ways to obtain guaranteed lifetime income. Not all employers offer pension plans, fewer now than ever before, so that income stream isn’t realistic for everyone. Annuity income can be purchased at any time and payments can begin immediately or be delayed for several years. Social Security payments from the government can begin in your 60’s, but there is only one way to control how much income you receive from Social Security. You can maximize your Social Security benefits by delaying income until you are age 70. There is no additional benefit received if you delay income past age 70. Your annual income and expected lifetime payout will increase from the delay, as will the retirement security for widows.
Now just because you are delaying the receipt of your Social Security income until age 70, that doesn’t mean that you have to wait until you are 70 to actually retire. You’ll have finance the first years of your retirement until age 70 with your retirement savings. The SCL and SOA study looked at a few different scenarios for using some of your retirement savings to finance your early retirement years. A 65-old woman would receive $16,895 yearly from Social Security, but that amount would increase to $23,903 if she delays payments until age 70. She can draw down from her retirement savings in the amount of $16,895, adjusted yearly for inflation, until she turns age 70. In essence, she is buying a lifetime annuity from Social Security in order to increase her annuity payment by $7,008 yearly. That’s quite a return. Some people choose to purchase a term certain annuity product with their retirement savings to guarantee this income from retirement until they start taking Social Security at age 70.
The study also looked at two different married couples and found that delaying Social Security payments until age 70 increased overall total retirement income. The increases ranged from 2 to over 13% averaged over their lifetime and included Social Security. While it’s possible to generate a larger increase in retirement income by investing all of your savings in stocks, there is a lot of risk involved in that as well. This is the savings they would use to pay their expenses while delaying Social Security. The study compared using this delay strategy to using annuities or retail investments. These three different types of investments can be used in conjunction, but the study didn’t find it more beneficial to replace the delay with either of these strategies.
The money that you use to replace Social Security while you are delaying payments is no longer liquid, so you have to have other funds available for emergencies. If your savings won’t allow you to delay Social Security until age 70, delay as long as you can or work part-time to help cover the money until you are 70. Annuities can help bridge the retirement income gap in a few different ways. You can use an annuity to cover the amount of annual income that you need in addition to Social Security or to cover your annual income before you start receiving Social Security payments. Speak with an expert about delaying Social Security and how you can make up for that delayed income or supplement the income with an annuity product.
Written by Rachel Summit