Page 16 - Investment Advisor April/May 2022

RETIREMENT PLANNING

multiplied by the probability that she will income given up unless the individual is claiming. A 66-year old average man
be alive to receive the future payment. in poor health. only gets a $1,194 increase in expected
The Social Security Administration At today’s TIPS rates, an average retirement wealth by waiting until his
has its own mortality table that esti- man earns $6,112 by waiting a year to full retirement age (67) to claim.
mates the lifespan of average Americans, claim after turning 62 according to If he waits an additional year follow-
but this isn’t relevant for most higher- calculations by David Blanchett, head ing the new 8% annual step, he gets a
income financial planning clients who of retirement research at PGIM. For $9,070 boost in wealth by waiting until
live significantly longer. This means a healthy woman, the benefit from his 68th birthday to claim. A healthy
they’re more likely to be alive at age 90 delayed claiming is $13,151. Delayed woman gets a $9,475 benefit delaying
or 95 to cash their Social Security check. claiming is one of the few financial plan- from age 66 to 67, but a remarkable
The higher probability of being alive ning strategies that provides a much $19,039 increase in lifetime wealth by
makes the higher income pay- waiting from 67 to 68. The
ment from delayed claiming Claiming before the valuable second step from age 67 to
more valuable. 68 is even more valuable to
The $1,000 increase in step-years can be a costly all groups of retirees than the
income is worth more than first step from 64 to 65.
you might expect. A 62-year- mistake. Workers who claim Although most experts
old woman doesn’t just get at full retirement age lose a agree that far more Americans
an extra $1,000 each year as should delay claiming to age
long as she’s alive (the 50th significant amount of wealth 70, the incremental benefit
percentile of longevity for an to delaying from age 69 to
average 62-year-old American by not taking advantage of the 70 is far more modest than
woman is 88, and age 92 for a the benefit from delaying in
healthy woman using Society most valuable 8% one-year the year after full retirement
of Actuaries (SOA) annu- age. For example, an average
ity tables). She gets $1,000 step increase. man sees only a $2,959 benefit
adjusted for inflation each from delaying between ages
year, and the inflation adjustment for higher benefit to women. Longer-lived 69 and 70 (vs. $9,070 between 67 and
2022 was a full 5.9% increase from 2021. Americans of both sexes also receive 68) and a healthy woman sees a $12,033
At today’s TIPS rates, $1,000 of a larger increase in net present value benefit (vs. $19,039 between 67 and 68).
income adjusted for inflation in 10 years from waiting to claim Social Security. It is important for advisors to remem-
is worth $1,051 right now. Our retiree has How much does a healthy woman ber that the decision to delay claiming
a 90% chance of being alive to receive benefit from waiting an additional year Social Security is not the same as the
the payment in 10 years using the SSA to claim at 64? Just $10,198, or about decision to retire. Withdrawals from
tables, and a 94% chance using SOA 22% less than waiting from age 62 to traditional IRAs before required mini-
annuity tables. Multiplying the value 63. But there’s an additional benefit to mum distributions kick in can be an
today with the probability of receiving waiting until age 65, when the annual efficient way to bridge the gap between
the payment results in a present value of increase rises from 5% to 6 2/3%. The retirement and initiating Social Security,
$988 for a healthy woman. present value of delaying from age 64 to resulting in greater retirement wealth
age 65 is $17,331. She gets a 70% increase and a more secure lifetime income.
OUTDATED FORMULA in net present value by waiting an addi-
The formula used to calculate the income tional year because of the step. For an Michael Finke, PhD, is professor of Wealth
boost from delayed claiming was estab- average man, the benefit increases from Management, director for the Granum Center
lished in the 1980s based on mortality $3,354 to $8,388, or 1.5 times higher than for Financial Security, and the Frank M. Engle
tables that don’t reflect improvements the value of waiting from 63 to 64. Distinguished Chair in Economic Security at
in longevity in recent years, particu- During the three years between an The American College of Financial Services.
larly among higher-income Americans. individual’s 64th and 67th birthday, the He joined The College in June 2016, having
Because the formula is outdated, the benefit continues to rise by 6 2/3% per served since 2006 as a professor and PhD
value of the future income payments year. This results in a gradual decline coordinator in the Department of Personal
is always higher than the one year of in the incremental benefit of delayed Financial Planning at Texas Tech University.

14 INVESTMENT ADVISOR APRIL/MAY 2022 | ThinkAdvisor.com