If you want a steady stream of retirement income that's guaranteeed to last for the rest of your life, you have three basic options, according the Center for Retirement Research at Boston College (there are other options, of course, but let's go with these):
- Use your retirement-account assets (e.g., from a 401(k) or an IRA) to purchase an "immediate annuity" that pays a fixed amount starting at the time you retire;
- Use retirement-account assets to buy a (less-expensive) "deferred annuity" that will start paying out several years into retirement; or
- Use retirement-account assets to live on for several years in early retirement and delay claiming your Social Security retirement benefit (or the higher-earning spouse's benefit) until age 70. By waiting until age 70, you'll claim the largest-possible Social Security benefit, and your benefit will act as an inflation-indexed annuity that will last for the rest of your lifetime. Further, in many cases, it will continue to provide an inflation-indexed income stream to your suriviving spouse.
A recent paper (PDF) from the Center recommends the third approach, but it notes that only a small percentage of people are following any of these approaches:
Right now, none of these three options is commonly used. Very few workers choose to purchase immediate or deferred annuities (the first two options). And few retirees appear to be deferring claiming in order to receive the maximum annuity income from Social Security — most people simply retire earlier and claim immediately....
Currently, most workers claim Social Security benefits before age 70...and as a result receive reduced amounts. The reduction occurs because Social Security monthly benefits are actuarially adjusted to ensure that the expected lifetime benefits for the average worker are equal whether he claims at age 62 or 70. As a result, monthly benefits claimed at 70 are at least 76 percent higher than those claimed at 62.
The financial publication Barron's has more on the research paper, which is titled "How Best to Annuitize Defined Contribution Assets?":
Using a mathematical model incorporating mortality statistics, market risk, and "consumption shocks" such as major health-care expenditures, the authors concluded that for almost all Americans, the bridge option [i.e., using other retirement assets to delay claiming Social Security] is the most-efficient use of retirement assets....
The authors point out that many newly retired Americans are reluctant to draw down their 401(k) or IRA balances to support themselves, fearing they eventually will run out of money or be unable to cover end-of-life health-care costs. With that money set aside, they claim Social Security benefits immediately upon retiring or simply work until they become eligible to claim benefits at age 62, the authors report.
Only 5% of men and 7% of women defer claiming Social Security benefits until age 70, according to the paper, and 35% of men and 40% of women claim benefits at age 62. In 2017, the median claiming age was 64 for men and 63 for women, the authors say.
The authors acknowledge that many Americans lack the financial resources to delay claiming until age 70, and for seniors facing serious health problems, claiming early might be the right move. But for those who can afford it, the bridge option makes sense because it allows retirees to essentially buy more Social Security income by waiting. And that income is superior to commercially available annuities because it is indexed to inflation, the paper says.
Each person's situation is different, and there are cases in which claiming Social Security benefits before age 70 makes sense. And, of course, for a two-earner couple, it often is wise for one spouse to claim earlier and one later. But there's a strong argument, as noted above, for having at least one earner delay until age 70 if possible.
Are you (or perhaps your spouse) planning to delay SS benefits to age 70? If so, what will be your source(s) of retirement income until then? You can "Join the Discussion" below.