In an age of medical advances and increasing life spans, good financial planning emphasizes minimizing the danger of running out of money before the end of life. What everyone needs is some sort of longevity insurance. Many such financial products are available for purchase, but they tend to be expensive and overly complex. The ideal would be an annuity for life, adjusted to keep up with inflation, guaranteed by a super-safe issuer, simple to understand, and without any additional costs.
The good news is that we all have such an annuity — our Social Security benefit. Indeed, this is the biggest financial asset many American families own. It is very easy to underestimate its worth; a recent study estimated the value for higher earners as being $390,000 for a single person and $710,000 for a married couple. Careful planning with this precious resource can make a tremendous difference in the quality of your later life.
The secret? Wait as long as you can; ideally until the benefit is maximized. Those who begin taking Social Security at age 62 will receive a smaller check for the rest of their lives. Even those who wait until the official full retirement age (formerly 65 and now slightly higher) are missing out on a deal that is too good to pass up; the future benefit is increased by approximately 8 percent each year that you wait until age 70.
Some people are worried, though, that they will “lose out” if they delay collecting and die early, because they will have received less money. Basic game theory (a study for which my old professor Thomas Schelling won the Nobel Prize) can guide us in better understanding the choice.
Consider the two fundamental claiming options (claim early/claim late) along with the two possibilities for your longevity (die early/die late). To analyze this effectively, make a chart like the one below. Start with your options and possibilities, then fill in each row with the words win or lose to indicate whether you would do well or poorly if that scenario occurred. Here’s what your result should look like:
|Claim Early||Claim Late|
At first glance, it appears that either claiming strategy offers an equal chance to win or lose. It all depends on when you die — something nobody knows in advance. Upon further reflection, though, the better answer becomes very obvious.
If you claim your benefit early and die young, your pleasure in “winning” will be limited. After all, you will be gone. Similarly, you will not suffer too much by making the “losing” bet of claiming late and dying early. Again, you won’t be around.
It quickly becomes clear that the “die early” option should not be given the same weight as the “die late” option. In fact, to make the whole thing remarkably simple, cross out the “die early” column. Claim early and you lose; claim later and you win. Simple.
The decision to maximize your benefits by waiting is in perfect accord with what I call the “highest and best use” of Social Security in financial planning. Use it as a superb longevity insurance policy. Be sure to build the monthly benefit to the highest amount the government will allow. It will be worth a small sacrifice in your 60s to be safer and more comfortable in your oldest years.
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