Life cycle theory predicts that individuals facing uncertain mortality will annuitize all or most of their retirement wealth. Researchers seeking to explain why retirees rarely purchase annuities have focused on imperfections in commercial annuities – including actuarially unfair pricing, lack of bequest protection, and illiquidity in the case of risky events like medical shocks. I study the annuity choice implicit in the timing of Social Security claiming and show that none of these can explain why most retirees claim benefits as early as possible, effectively choosing the minimum annuity. Most early claimers in the Health and Retirement Study had sufficient liquidity to delay Social Security longer than they actually did and could have increased lifetime consumption by delaying. Because the marginal annuity obtained through delay is better than actuarially fair, standard bequest motives cannot explain the puzzle. Nor can the risk of out-of-pocket nursing home costs, since these are concentrated at older ages past the break-even point for delayed claiming. Social Security claiming patterns, therefore, add to the evidence that behavioral explanations may be needed to explain the annuity puzzle.
intercst: "Harvard researcher tries to explain the “Bird in the Hand” Social Security claiming strategy that defies arithmetic and leaves $100,000 on the table.
Social Security Claiming and the Annuity Puzzle
Most early claimers in the Health and Retirement Study had sufficient liquidity to delay Social Security longer than they actually did . . .
Translation: “People be crazy”.
Or, many people need their SS early because of insufficient other assets, contrary to the assert of most early claimers. . . .
<<Most early claimers in the Health and Retirement Study had sufficient liquidity to delay Social Security longer than they actually did . . .
Translation: “People be crazy”.>>
Or, many people need their SS early because of insufficient other assets, contrary to the assert of most early claimers. . . .
No. The author is clearly talking about people with sufficient liquidity to delay SS benefits – those are the folks in need of the “behavioral analysis” to explain the thinking.
People decide how they receive social security based upon their own assumptions, beliefs and circumstances.
From my perspective, there is no wrong decision regarding when a retired individual decides to collect social security.
Howie52 People’s perception of needs, wants, and desires rarely match the views of outsiders or folks who either conduct or read economic studies.
I don’t think this is correct. There ARE wrong decisions regarding the timing of SS. Just as there are wrong decisions on most things. And my observation is that many who make a wrong decision on SS are doing so because they have to in order to fix prior wrong financial decisions.
People’s perception of needs, wants, and desires rarely match the views of outsiders or folks who either conduct or read economic studies.
Absolutely! But that doesn’t change the arithmetic of a decision that’s costing you $100,000. Just like a peculiar view of “free-dumb” didn’t help the 300,000 extra unvaccinated people who have died since the COVID vaccine was readily available in April/May of last year.
"But that doesn’t change the arithmetic of a decision that’s costing you $100,000. "
I disagree. The perception a person brings to a decision is a major influence upon any
calculation made. The entire basis of insurance products is based upon perception and how
an individual envisions risk and what they feel is a “cost” to alleviate some portion of
risk.
Long-term care insurance, annuities, what a person’s expectation of their own investments
might be, what a person’s views on their relationships, their health, the health of their
immediate family plus what they view as their need to help said family.
Individuals tend to have very unique perspectives on the relative importance of funding - and
have their own views regarding the “time-value” of money.
Howie52
I think folks who tend to view decisions as purely economic - or are more “calculation”
based in decision making will tend to have their tendencies or biases confirmed via their
own assumptions - and there is nothing wrong in their approach either.
""But that doesn’t change the arithmetic of a decision that’s costing you $100,000. “”
And that is true only for HALF the people.
The break even point these days is what, age 86. By then, half of males will kick the bucket and only half will live beyond that.
If your family tree tends to end in the 70s and early 80s, then that $100,000 is fictional unless you think you are going to be the one living longer than the rest.
Unlike misers who don’t even spend 1% of their portfolio each year, and let their portfolio increase at 11% annually typically in a market based index to have more money than they’ll ever spend, your $100,000 is only there if you live to a ripe old age well beyond 86. Meanwhile, if you had taken the same amount as your yearly SS from your portfolio, waiting to age 70, again IF you survive to age 70 without being in a small plane crash, large plane crash, auto crash, or die from a pandemic disease, you’ve reduced your future growth and earnings by…that amount, no longer compounding at typically 11% a year (SP500 gain). Not guaranteed but market has been good to most.
Others may have health situations likely to end their life long before 86, so deferring taking SS from age 62 or 66 to age 70 is going to COST THEM MONEY. Money left on the table.
There are all kinds of risks to putting the benefit collection part of SS off. You could get hit by a bus next week or next year and collect nothing. Republicans could take over the country and eliminate or dramatically reduce the inflation index applied to SS payments - or even eliminate the program. Congress could fail to fund the program adequately and decide to reduce actual payouts at any time. . .
Risk leads people to worry and stress. The risk may be rational or irrational. It may be probable or improbable. But risk leads people to worry and stress. So how much are people willing to pay to reduce the risk? That’s their decision, not mine. I’ll be waiting to take my benefits because I am willing and able to accept the risks, but that’s just me.
This is a plan endorsed by our financial professional, who recommended that I and my wife begin taking SS benefits now (at 63).
we have a sufficient nest egg to delay
but by taking SS now, we allow our nest egg to grow for more years
but…
don’t worry about letting the nest egg grow.
we are in excellent health now and plan to live into our mid-90s.
But will we be in excellent health at age 72?
and if so, for how many more years?
if we start spending now (enjoying our savings), by age 72 we will have been doing it for 10 years already.
It’s not like we’ll be profligate; with SS we need only draw down a percent or two…less if we decide to work part time for money, vs. 4-6% from savings (and always watching that balance) if we delay.
and the coup de grace!-
if, at age 72 we are still robustly healthy and wished we’d waited, there is the SSA 521 Do-Over.
Our nest egg is large enough and we will draw our savings down little enough that at age 72 (or whenever) we can pay all of the previously received benefits back (without interest, penalties, or fees of any sort) and start over at age 72 (or whatever age we are at) at the higher annuity.
This strategy is entirely rational and financially sound, but most importantly- emotionally liberating.
This is a plan endorsed by our financial professional, who recommended that I and my wife begin taking SS benefits now (at 63).
Does your financial professional get paid based on the size of your account that might be spent down somewhat if delaying SS? If so, this could be a conflict of interest.
This is a plan endorsed by our financial professional, who recommended that I and my wife begin taking SS benefits now (at 63).
Interesting. Our FP has been very clear about recommending that I delay until 70 to collect (I am a year younger than DH, I get a larger SS amount, and my family has great genes with Dad being 101 and his sister a youthful 97) and that DH collect at FRA. This is actually the same conclusion that I came to based on my analysis of our situation.
6. if, at age 72 we are still robustly healthy and wished we’d waited, there is the SSA 521 Do-Over.
I think I agree with a previous poster that your FP is looking at keeping your funds under his management so that his fee is higher. I’d be looking for another FP, or at the very least, I’d be looking for another opinion from a different FP.
That said, if taking SS sooner allows you to do more while you are still young and able, then you may still want to do it. But at least understand it all correctly when making your decision.
6. if, at age 72 we are still robustly healthy and wished we’d waited, there is the SSA 521 Do-Over. Our nest egg is large enough and we will draw our savings down little enough that at age 72 (or whenever) we can pay all of the previously received benefits back (without interest, penalties, or fees of any sort) and start over at age 72 (or whatever age we are at) at the higher annuity.
If this was suggested by your FP, you need a new one. You have to do it within the first 12 months of the original application for retirement benefits. Since you stated you would start at age 63, the option to use this expires when you are 64.
This is a plan endorsed by our financial professional, who recommended that I and my wife begin taking SS benefits now (at 63).
1. we have a sufficient nest egg to delay
2. but by taking SS now, we allow our nest egg to grow for more years
And how is your financial professional compensated? % of portfolio? If so, it’s very much in his interest that you take SS now and leave your portfolio intact. He gets paid more that way.
I read an on-line magazine for the financial planner industry, and unsurprisingly, they said to tell your clients to take SS right away and not do Roth conversions, pointing out that the alternatives to those two items resulted in decreased size of portfolio, (even though you would be getting a SS income and not have to pay taxes down the road on the Roth,) which hurt the size of their commission. Not a big deal if one or two clients do it, but multiply that decrease by the number of clients you have. Adds up.
Interesting. Our FP has been very clear about recommending that I delay until 70 to collect…
Sounds like you have a decent FP who is ahead of his time considering his service to be fiduciary.
We had a FP for a short time. It seemed like every idea I had, retiring early, delaying SS til 70, Roth Conversions, were met initially with you can’t or shouldn’t do that. Sure we can, I would tell him. Run the specific numbers. Sure enough, he would come back and agree with me. Was a cookie cutter by the formula approach to all things that did one thing well…put our money in his pocket and finally convince DH that I knew more than the FP so why were we paying him to put our money into mutual funds?
These guys typically all have at least one thing in common…they are good salesmen.
This strategy is entirely rational and financially sound, but most importantly- emotionally liberating.
As others have already pointed out, unfortunately as emotionally liberating as it may sound, it’s not true. Your FP may very well make you feel emotionally liberated, but when push comes to shove if he screws up, and he has here, you are the one who has to live with the consequences. If you want to have an FP, use him as a source of ideas, but do your own due diligence and google your way to verify what he suggests. Never forget he is first and foremost a salesman. It could well be that he has important things to sell you, or it may all be castles in the air. Let your keyboard confirm his theories. Be an active consumer and protect yourself.
As others have already pointed out, unfortunately as emotionally liberating as it may sound, it’s not true. Your FP may very well make you feel emotionally liberated, but when push comes to shove if he screws up, and he has here, you are the one who has to live with the consequences. If you want to have an FP, use him as a source of ideas, but do your own due diligence and google your way to verify what he suggests. Never forget he is first and foremost a salesman. It could well be that he has important things to sell you, or it may all be castles in the air. Let your keyboard confirm his theories. Be an active consumer and protect yourself.
This is what concerns me. It took me about a minute to look up SSA-521 and its limitations. It seems this poster didn’t do his own due diligence.
Sounds like you have a decent FP who is ahead of his time considering his service to be fiduciary.
Yeah, listening to some of the stories folks tell here about their FP’s has made me very thankful for our guy. He is also encouraging us to do the Roth conversions, although we are leaving those accounts with him, so his commission is basically the same either way. He has successfully gotten me to have some bonds, though we won’t ever get to an allocation that he would like. I think we are something like 85/15 or 80/20 now, but he buys the actual bonds and so we hold them to maturity and therefore don’t worry about the various fluctuations. He also does not charge any fee for the bond account as he says that he really doesn’t do much to manage them except choose the bonds. He’s also steadily decreased his fee from around 1.5% down to .85%, but as he has continued to grow the account, he still sees more dollars every year.
He has his own investing model and has built his own spreadsheets over the years, so understands the various assumptions that he is using and can explain them to me.
We have actually followed him through 3 brokerage changes including a stop at Wells Fargo which he left prior to their issues because he could read the writing on the wall.
Like you, I tend to be the FP in this house, and having a real FP that we pay is just an insurance policy should I predecease DH so that I know DH will have his money handled well. The FP knows that, and also knows that if DH predeceases me, the FP is most likely fired because I can do what he’s doing, though I may opt to keep him since the numbers are so big and I don’t like to spend a lot of time on the investments these days - I’d rather be sewing or playing golf.
But yeah, we do seem to have found a good one who is not anything like the stereotypical FP.
2. but by taking SS now, we allow our nest egg to grow for more years
If much of your nest egg is in Traditional accounts, your FP should have also warned you about the tax impacts of the significantly larger RMDs will be, especially for the second to die. If they didn’t, you should be looking for a new FP.
6. if, at age 72 we are still robustly healthy and wished we’d waited, there is the SSA 521 Do-Over. Our nest egg is large enough and we will draw our savings down little enough that at age 72 (or whenever) we can pay all of the previously received benefits back (without interest, penalties, or fees of any sort) and start over at age 72 (or whatever age we are at) at the higher annuity.
If you change your mind about starting your benefits, you can cancel your application for up to 12 months after you became entitled to retirement benefits.
The fact that your FP gave you the incorrect advice that you could apply for a withdrawal of benefits 9 years after you started receiving them is reason enough to be looking for a new FP, IMO.
This strategy is entirely rational and financially sound, but most importantly- emotionally liberating.
Except it’s based on incomplete and incorrect information, at least based on what you shared. I would agree with others that your FP is playing on your emotions to keep your assets under their management. The 3rd strike on reasons to be looking for a new FP, IMO.