Social Security Series- Part 3 of 5: Delayed CreditsSubmitted by Guidant Planning on May 9th, 2011
It pays to delay taking Social Security benefits
As we move into part 3 of our Social Security Series, an important determination that must be made is whether one has, or can afford the patients to take advantage of delayed credits.
The policy of delayed credits states that the Social Security Administration will pay you 8% per year for delaying your benefits past full-retirement age. In a time where many investments struggle to yield 1 or 2 percent, this is definitely an aspect of your retirement to think about. And for those who are married, delayed credits can also play a role in the prior 2 parts of our series- Survivor Benefits, and Spousal Benefits.
Does it make sense to defer Social Security benefits?
Based on the high percentage return, the short and simple answer is yes. However, we all know that there not much in life is that simple. The conventional wisdom has been to take the money and run. Yet a fresh examination of delayed credits indicates the conventional wisdom could be wrong. It may be more advantageous to wait, and received an increased benefit for the rest of your life.
Let’s start with a simple exercise. For anyone born in 1943 or later, Social Security benefits will increase by 8 percent for each year of deferral beyond age 66. The benefits will also increase by the cost-of-living adjustment that all recipients receive.
That’s a hefty increase. A worker who is entitled to benefits of $1,000 per month at 66, for instance, would enjoy an increased benefit of $80 a month — simply by delaying a year.
Is that a good idea?
Like any financial option, the decision rests on a thorough evaluation of one’s specific situation. It depends on your options. In other words, if you delayed receiving Social Security how would you finance your lifestyle? If the answer is from savings, then it could be a brilliant idea. Currently, money market and CD rates are next to zero, so if you withdraw funds from low-yielding accounts to finance your retirement you could realize an 8% return on your deferred Social Security benefit. Additionally, that increase is for the rest of your life and should your spouse have a benefit smaller than yours then they could realize that increase for the rest of their life too.
Bottom line: If you use your savings to defer taking Social Security, you can increase your lifetime income more than you would by investing the same money or by buying a fixed lifetime annuity. Better still, deferral sidesteps all worries about making investment choices.
Personally I think this is the best deal going. You get an 8% return on your benefits guaranteed by our government.
Is this without risk? No, there are exceptions. The first is that you might die while you are deferring your Social Security benefits or before you’ve crossed your break-even point, so you might never collect any or not enough. You face the same risk, however, for any money you don’t spend. One of the most basic rules of life and death hasn’t changed: You can’t take it with you.
The second is that Social Security might mail you a bad check. There is no immediate danger but no one knows what the future holds. More important, imagine what your other investments will be doing when, and if, Social Security defaults.
Then why do so many people take benefits so early? Why don’t more seniors delay taking benefits? There is a one-word answer for this- Necessity. So you need to answer the question based on your own finances to determine whether delaying benefits makes financial sense in your situation.
Information gathered from www.boston.com, posted by Scott Burns & HorsesMouth.