MONEY retirement planning

Social Security is the Best Deal

Alicia Munnell, 71, professor of management, Boston College, © M. Cody Pickens Photography 2013

Social Security isn't going anywhere. And it's time to get smart about how to use it.

Choppy markets and rising health care costs needn’t stop you from having the money for the retirement you want. We asked five of the brightest minds in retirement planning for their big ideas to help you cruise through the obstacles.

Below, advice from our fifth expert, Alicia Munnell, one the nation’s leading retirement researchers.

Big idea: Social Security is the best deal going

Just nine years ago President George W. Bush was leading a push to allow workers to direct a portion of their Social Security taxes into a personal account. By doing so, the thinking went, you could earn higher returns by investing in the stock market compared with what you would receive with Social Security.

You don’t hear much about ideas like that these days. “Since the financial crisis, we have seen a sea change in how people view Social Security,” says Alicia Munnell, the head of Boston College’s Center for Retirement Research. “Social Security paid benefits, paid them on time, and they didn’t go down.”

Munnell is a former Clinton administration hand and was never a fan of Bush-style private accounts to begin with. It’s clear, though, that the politics have changed. While Munnell has argued for keeping Social Security mostly as is, Sen. Elizabeth Warren (D-Mass.) is calling to expand the program’s benefits instead.

Don’t hold your breath. But it’s a good bet that Social Security isn’t going anywhere. And Munnell says you should get smart about how you use it.

What Social Security calls the full retirement age is 66 for those born between 1943 and 1954. (It gradually moves up to 67 for those born later.) If you claim at 62, the earliest possible age, you’ll receive 25% less than at 66. But “full” retirement is just jargon left over from old Social Security rules that have since changed. Now, for each year you defer to age 70, your benefit keeps increasing until it is 76% more than if you start at 62.

“The best-kept secret in America is that the real full retirement age is 70,” says Munnell. Actually there may be an even better-kept one: Munnell’s group has shown that today’s low rates make waiting on Social Security a particularly good deal.

Basically, it beats the alternative investment. Each year you hold off from claiming is like buying an annuity: The money you give up now comes back to you later as extra lifetime income. For example, you can get 8% more inflation-adjusted pay if you wait until 67 instead of collecting at 66. That compares with a 5.4% real income from an annuity.

MAKE THE RIGHT MOVES

Work, if that works. Not everyone wants to work longer, but it makes waiting to collect easier. It can increase your payout further if more peak-earning years go into the benefits equation.

Use savings, carefully. You may be able to defer claiming for a year or two by tapping your portfolio for more income. “As long as you don’t overdo withdrawals, this strategy makes sense since you end up with higher lifetime benefits,” says Christine Fahlund, senior financial planner at T. Rowe Price. When waiting doesn’t work: If you can’t do without the cash. Or if you think you won’t live to 80, since in that case the extra income doesn’t add up to as much.

Couples have more options. The strategies get more complex for married couples, since one of you may qualify for spousal benefits or receive a payout as a surviving spouse. If you both don’t want to wait until age 70 to file, a calculator like the Social Security Benefits Evaluator at troweprice.com can help you decide which spouse should file and when. With the right strategy, you can get some income now as well as a higher benefit later.

Extending your career gracefully

Work is a bigger part of what used to be considered the retirement years: One-third of people 65 to 69 are in the labor force, up from 22% in 1990. More years of pay can help make it easier to reach your retirement goals, but what if you can’t keep your job as long as you’d like? Or you just hate it? Here are some strategies to manage the late phase of your career:

Use online tools to stay sharp. Lynda.com offers online courses on business skills such as online marketing or using software tools. You can also get tips on networking or transitioning to freelance. The site costs $25 a month.

Ask for flexibility. If you still like working but the hours and office politics are wearing thin, talk to your employer about telecommuting or going part-time on a trial basis. “Bosses are more willing to make accommodations than you might expect,” says career coach Bobbie Jo Hunter. Now is a good time to ask: Employers are still cautious about staffing up, but the improving economy gives them an incentive to hang on to experienced people.

Early in her career Alicia Munnell headed research at the Boston Federal Reserve. In 1993 she became an assistant Treasury secretary and later joined the Council of Economic Advisers. She then moved to Boston College, where she founded the Center for Retirement Research. Her 2004 book, Coming Up Short, was one of the first to sound the alarm about the flaws of 401(k) plans.

Click below to see more big ideas from some of the retirement-planning world’s sharpest minds:

Forget the 4% withdrawal rule: Wade Pfau, professor of retirement income, American College

You’ll spend less as you age: David Blanchett, director of research, Morningstar Investment Management

Plan to pay for future health costs: Carolyn McClanahan, president, Life Planning Partners

Plan for the critical first decade: Michael Kitces, partner and director of research, Pinnacle Advisory

 

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