Retirement & Financial Planning Report

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While Social Security benefits are not a form of annuity, delaying claiming those benefits is much like purchasing one—and would be a notably good deal as annuities go, a study has said.

A report from the Center for Retirement Research notes that purchasing annuities is one of the least-used ways to handle retirement savings after retiring, even though they “ensure higher levels of lifetime income, reduce the likelihood that people will outlive their resources, and alleviate some of the anxiety associated with post-retirement investing.” While the report did not specifically mention the federal TSP program, that trend also is seen there, where only low single digits of account holders purchase annuities after separation.

Reasons include the low current rates of returns on such policies, higher costs because they tend to be purchased by people who expect to live especially long; “a reluctance to hand over a pile of accumulated assets for a stream of future income, and a failure to understand the value of insurance against outliving one’s resources,” it said.

Meanwhile, while Social Security allows for beginning benefits as early as age 62, there are reductions for beginning before “full retirement age”—currently 66 and four months, for new retirees—and add-ons for delaying beyond that age up to beginning benefits at age 70.

Between the two factors, waiting the eight years between 62 and 70 to begin benefits increases the benefit by three-quarters, it said—effectively a much higher rate of return than other no-risk investments offer. However, in practice most people claim Social Security before their full retirement age and only 5 percent wait to age 70, it said.

The report said one option to bridge the period up to age 70 from the time the person otherwise would have started taking Social Security would be to use more of their retirement savings during those years than they would use otherwise. That “would allow participants, in essence, to buy a higher Social Security benefit.”

Waiting for a larger Social Security benefit later further “does not involve handing over accumulated assets to an insurance company, provides a familiar form of lifetime income that is adjusted for inflation, and does not expose the purchaser to higher costs from adverse selection.”

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