The Best Investment
For Someone Approaching Age 62
Iím often asked to recommend investments for those interested in early retirement and what they should do about social security.† For those with sufficient savings, I believe that the best answer is to spend down part of their investments and delay the start of social security as long as they can and still have significant investment reserves for future large purchases and emergencies.
Letís look at an example of a relatively high wage earner with a non working spouse.† Lower wage earners would not have to save as much and do better proportionately.
Suppose we have a couple of equal ages approaching age 62 with $290,000 invested conservatively in a retirement account with returns at least equal to inflation. †(The example also works if they have a little less in a taxable account depending on their tax rate.)† Then the primary wage earner could delay the start of social security till age 70 and a low income spouse could delay social security till age 66.† It doesnít do any good for a low income spouse to delay any longer.
Now letís further suppose that the primary wage earnerís social security report shows the following:
$1,350 per month at 62
$1,860 per month at 66 (Full retirement age)
$2,540 per month at 70
With $290,000 available, the couple would have enough to support themselves for eight years with an annual income of $41,640 adjusted upward for inflation each year accounting for the low income spouseís contribution of $930 per month starting at age 66.† After the eight years, their combined social security would equal $41,640 per year for their life until one died at which point the survivor would get $30,480 per year, all inflation adjusted.
$41,640 is $19,365 more per year than they could get if both started social security at age 62.† Effectively, that $290,000 of savings bought a lifetime immediate annuity that pays $19,365 per year with an unlimited inflation adjustment and, theoretically guaranteed by the government.† I say theoretically because who knows what will happen to social security in the future.† Nevertheless, congress will telegraph its actions long before a person would have to change directions and people would most likely still be better off.
So what kind of inflation protected immediate annuity could you buy on the market for $290,000?† The best I could find was Vanguardís which would pay close to $11,900 per year.† Thatís only a little over 60% of the extra value you would get by delaying social security. †Also, its terms are not as good because Vanguardís inflation adjustment is capped at 10% per year, its death benefits are less, and it does not have government backing.
The example above is for a couple in a situation that requires the maximum savings, but whether single or married, delaying social security can be one heck of an investment and even better than the example.† Try the free Social Security at 62, 66 or 70 calculator on www.analyzenow.com to see how you would fare.
The figure above from depicts annual income in todayís dollar values for the couple when one dies at 85 and the other lives on.† The gains later in life are very significant and important.† Source:† www.analyzenow.com.
The corresponding investment values above show that the initial $290,000 is exhausted by age 70 if the higher income spouse delays social security till age 70 and the lower income spouse starts at age 66, but the lifetime income benefits are substantial and more than most people will be able to get from $290,000.† Source:† www.analyzenow.com.
Copyright©2006 Henry K. Hebeler