January 8, 2016 AZ Republic by Dr. Harold Wong
For decades, many have underestimated the crucial importance of maximizing your Social Security and other retirement income. In 2014, the average Social Security (SS) retirement benefit was $1,294 per month. “Among elderly SS beneficiaries, 52 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from SS.” Source: “How Social Security Strategies Affect Your Retirement”, by Dr. Harold Wong, published 5/23/2014 in The AZ Republic.
Example: if you are an older Baby Boomer, your Full Retirement Age (FRA) is 66 and suppose your SS benefit is $2,000/month. If you took SS at age 62, you’re hit with a 25 percent penalty and your SS benefit is $1,500/month. If you wait until age 70 to maximize your SS benefit, you get 32 percent more, or $2,640/month. Only 5.2% of men and 11.4% off women waited until age 66. Only 1.2% of men and 2% of women waited until age 70.
In today’s world of money, you are looking at 2% returns from intermediate bonds or 10-year Treasury notes and 3% returns from 30-year Treasury bonds. Let’s look at SS differently and consider it to be one of our investment asset classes. For you to receive $1,500/month, you would have had to save $720,000 if you earned 2.5% interest. To earn $2,000/month, your savings would have to be $960,000; to earn $2,640/month, your savings would have to be $1,267,200. In addition, SS benefits historically do receive a modest cost of living increase (COL), even though 2016 will be the 3rd year out of the last 6 where there was zero COL.
By waiting 4 years from age 62 to 66 to take your SS benefits, it’s like you saved an extra $240,000. If you wait 8 years until age 70 to take your SS benefits, it’s like you saved an extra $547,200. Even if you believe that you can earn a net (after mutual funds and brokerage fees) of 5% annually in the stock market, you would need to save about $54,650/year for 8 years to accumulate an extra $547,200. Given that the U.S. average savings rate was 5.50% in November, 2015, you would need total earnings of $9,949,091 during the 8-year period from age 62 to 70 to save an extra $547,200 (if there were no earnings at all). We assume that very few readers earn $1,243,636 annually.
A private pension plan is mathematically one of the most efficient ways to increase your retirement income. Example: If you want to take SS at age 62 and receive $1,500/month, how much would a 62-year-old male have to deposit so that he would have an extra $1,140 monthly ($2,640 at age 70 vs. $1,500 at age 62) at age 70.? He would have to deposit $150,000 and let it grow for 8 years. At age 70, he could receive $1,140/month every year from age 70 until death. Note that $150,000 is only 27.41% of the extra $547,200 of savings required in the previous example, if earning 2.5% annually, to generate this extra income. Even better, this private pension income is guaranteed to never go down for the rest of your life. For many, it’s possible to save
Conclusion: Almost everyone is better off waiting until age 70 to take SS benefits and to rely on a private pension instead of just the bank, bonds, and stock market dividends to fund your retirement income. Most could save $150,000 after a lifetime of work but many cannot save $547,200.
Free Seminars at Desert Foothills Library: On Sat. 1/16/2016, 10:30 am-12:30 pm, “How to Maximize Your Social Security & Other Retirement Income” will be given. On Weds. 1/20/2016, 2-4 pm, “Common-Sense Financial Strategies” will be given. Both are at 38443 N. Schoolhouse Road, Cave Creek, AZ 85331. Please RSVP at (800) 955-1408.