According to the Center for Retirement Research at Boston College, most retirees elect to receive social security benefits as early as possible. About 53% of men and 59% of women elect to receive their benefits at 62 - the earliest eligibility age (EEA).
Of course, taking early benefits can come at a stiff cost. Depending on your scheduled normal retirement age, you can expect between a 20 and 40 percent benefit reduction compared to the full social security benefit available at normal retirement. In other words, waitng a few years can be worth about an 8% risk-free, annualized return, payable for the remainder of your life.
This is particularly important given the increased longevity of today’s retirees and the risk they face of outliving their retirement savings. In 1960, when the EEA option was first made available, the average life expectancy for a 62-year old worker was 18 years; in 2004 it was 21 years. Today, nearly a one-third of women and almost one-fifth of men will live into their 90s.
Yet, most seniors clearly feel they cannot wait 3 or 4 years for the monthly social security income stream to begin. For this group it is important to consider other options that will provide the needed monthly income while allowing them to realize the rewards of delaying social security.
One option is to tap 401(k), IRA or other retirement savings first. Often retirees try to preserve these savings until later in retirement, but given the tradeoff with enahncing social security benefits, this may not be the best strategy.
A second option is to work longer. This can have the additional benefit of increasing the wages and service credit figures that go into computing social security benefits.
Finally, in some cases it may be sensible to borrow against a home equity line of credit to bridge the years between 62 and full retirement benefits. Here’s how this strategy works:
1. According to the “Quick” calculator available at the Social Security website, here’s the basic benefit options facing a 62-year old earning $60,000 at retirement:
| Retirement age | Monthly benefit |
|---|---|
| 62 and 1 month | $1,081.00 |
| 66 | $1,530.00 |
| 70 | $2,138.00 |
| Retirement ages considered | Break-even age |
|---|---|
| 62 and 1 month versus 66 |
75 years and 5 months |
| 62 and 1 month versus 70 |
78 years and 1 month |
| 66 versus 70 |
80 years and 0 months |
By postponing social security benefits until normal retirement age (66 in 2010), the retiree’s monthly benefit will be increased $449 (from $1,081 to $1,530 - more than 41%). Further the retiree will “break-even” (i.e. recoup the full value of the forgone early benefits) by living to age 75 and 5 months. Living beyond this point gains additional lifetime income that would be lost to the person electing benefit payments at 62.
2. If the retiree has adequate home equity, an interest-only HELOC could be drawn against with required interest payments also being made from the line of credit. At a conservative assumed rate of 10%, the loan would look like this at age 66:
| Amount Borrowed (48 x $1081) | $51,888 |
| Total Interest Paid | $11,591 |
| Total Amount Owed | $63,479 |
3. Thus, for an out-of-pocket cost of $11,591 the retiree has purchased an additional lifetime monthly income stream of $449. In reality, the situation is better because a) the interest paid is tax-deductible and, b) the $449 lifetime income stream is indexed to increase with inflation.
4. At age 66 there remains an outstanding loan balance of $63,479 requiring repayment. Repayment of the principal amount is not a “cost” (as is the $11,591 interest) since these funds were used to pay living costs. A form of savings (home equity) was simply used in lieu of other savings to bridge the gap between age 62 and age 66.
Still, the loan will continue to accrue interest and will require eventual monthly principal payments unless repaid. Two main options are available:
First, the senior homeowner could sell and downsize to a smaller home. The loan would then be repaid from the sale and proceeds above the loan balance would belong to the homeowner.
Second, if the senior homeowner wishes to remain in the home (as is often the case) a reverse mortgage can be a means to pay off the HELOC and, if sufficient home equity is available, provide an additional lifetime income stream. Reverse mortgages are quite complex and can be expensive if the borrower dies or the home is sold within a few years.
On the other hand with a reverse mortgage the older the borrower, the more favorable the loan terms. Thus, as with social security, even though these loans can be taken out as early as age 62, waiting is advantageous.
Technorati Tags: retirement savings, home equity line of credit, HELOC, reverse mortgage
June 18th, 2008 at 4:38 am
Hello, For me also security most importand thing. Because i am livin in middle east and here have many terror. More over every day can dies some body. And we are using the here many security protection and metarial.