Thaler: How to Convert Your Social Security Payments into an Inflation-Adjusted Annuity

Professor Richard Thaler offers up some very practical advice for future social security recipients:

There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits.

Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70. The claiming formula is designed to make the economic value of the stream of benefits the same, regardless of when you start. The longer you wait, the greater your monthly benefits when you start getting checks, because you will not receive them for as long a period. If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

With these rules, waiting is the cheapest way to buy more annuity coverage. However, few take advantage of this opportunity. Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible, the government says. Less than 5 percent of participants delay past age 66. This is unfortunate. If you are in good health and you can afford to wait, my advice is that you should wait as long as possible. The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living “too long.”

Straightforward, intelligent observation . . .


Getting the Most Out of Social Security
NYT, July 16, 2011

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