Here’s a shocking and depressing piece of news. The average healthy woman is throwing away more than $130,000 worth of retirement benefits if she starts taking Social Security as soon as she can, at age 62.
And yet about two-thirds of women do just that.
It’s like buying a brand new Porsche 911 on the day you retire and just pushing it off a cliff.
So reveal Sophia Duffy, professor at the American College of Financial Services, Michael Finke, also at the American College, and David Blanchett, head of research at Morningstar.
They’ve worked out that a woman with average earnings is giving up about $130,000 in retirement benefits when she chooses to take Social Security as soon as she can, instead of waiting until age 70, when her benefits will max out. For a high-earning woman, the loss from cashing in at 62 amount to a staggering $180,000. (At these levels she’s not just pushing a Porsche off a cliff — she’s getting close to trashing a new Ferrari Portofino.)
For men the sums are smaller, because we don’t tend to live as long, but they’re still pretty hefty. A man with average earnings who starts claiming at 62 is passing up nearly $90,000 in retirement benefits, the researchers calculate. For a high-earner the figure is over $150,000.
Yikes. But where do these sums come from?
The researchers talk about real yields, TIPS bonds, and discount rates in order to put a capital value on our Social Security benefits. A rough but simpler way to approach this is simply to imagine what our Social Security benefits would cost if we had to buy them in the private insurance market.
If we even could — which we can’t.
Social Security, after all, is that most precious of retirement products. It’s a lifetime annuity that is backed by the United States government, and which will pay us a monthly income for life, whether we live to 69, 89 or 119. Oh, and most important: It is guaranteed against inflation. We can bicker about whether the government measures inflation accurately when working out each year’s cost of living adjustment, but it’s better than nothing. And that’s what most private-sector lifetime annuities give you: Nothing.
Social Security lets us start claiming early, age 62. But the earlier we start claiming, the less we get each month. Wait until we’re 70 and we’ll get nearly twice as much each month as we would if you started at 62.
It’s not always an easy subject to settle. Many people, especially low earners, claim at 62 and argue they really have no choice: They need the money, now. Many others wonder if they’ll live long enough make delaying profitable. At age 62, the average man can expect to live until he’s about 83 and the average woman until she’s 86, says the Centers for Disease Control and Prevention. But someone who waits till they are 70 to start claiming benefits isn’t really ahead of the game until they make it until nearly 80 anyway.
But there’s a wrinkle. Actuaries, economists, and financial planners call it “longevity risk.” We don’t know how long we’re going to live. And we all want to protect ourselves against the danger we end up outlasting our savings.
And this is where Social Security is worth more than it seems. It’s not just an estimated revenue stream. It’s a guaranteed, inflation-adjusted lifetime revenue stream.
You couldn’t buy this kind of stuff now even if you wanted to. Inflation-protected government bonds, or TIPS, pay interest rates or yields that are now below the rate of inflation. (Short-term TIPS are actually guaranteed to erode your purchasing power by around 2.5% a year. We might wonder how something guaranteed to make us suffer at the hands of inflation can be marketed as “inflation protected.” The simplest answer is that they’re sold by the government, and who is going to stop them?)
Duffy, Finke and Blanchett cite studies showing that around two-thirds of all women start claiming Social Security at age 62, and 95% by the age of 65. It is, literally, throwing money away.