No, we haven’t turned Young Wealth into a senior citizens advice column today, but knowing how to use your Social Security retirement payments in the future, even if it’s forty years from now, is pretty important. While it is our steadfast hope that every young worker reading this column will be so filthy rich by the time they’re ready to retire that Social Security won’t even be a consideration, the majority of today’s workers reach retirement age with nothing in addition to their Social Security than a 401k pension plan.
While a 401k is great idea (we like the self-directed version best of all), the problem is it’s tough to live off interest alone, and hard-earned principal slips slowly away – or quickly, depending on your spending habits. This is where the idea of an annuity comes in. Make no mistake, we think most commercial annuities are a hideously bad idea for the purchaser. The actuarial tables used are by no means reflective of reality and the extremely high marketing and advertising costs are built in as well.
To make sure we’re on the same page going forward, let’s define what an annuity is: A fixed sum of money paid to someone each year, typically for the rest of their life.
Put in those terms, we see that the Social Security system itself is essentially an annuity. The trick is to get that annuity as high as possible before you start using it. Thus today’s strategy. You may or may not be aware that you can increase your monthly Social Security
retirement payment simply by postponing the age at which you begin drawing a check. For example, a retiree can claim $12,000 a year beginning at age 65, but by waiting a year, to age 66, that number goes up to $12,860, meaning you gain $860 a year as long as you live simply by waiting an additional twelve months. The longer you intend to live, the more financial sense this makes. What do you use for income during that year? Well, you could keep working, or if you’re sick of that, take $12,860 out of savings and live on that in place of the Social Security checks you would have been collecting.
The numbers actually work out better than going the commercial annuity route. Dividing the purchase price ($12,860) by the additional income gained ($860) works out to a percent of purchase price of 6.7%, which is much higher than on the open market.
Just something to think about as you work your way through life.
The Young Wealth Team
Flickr / DonkeyHotey