Should you buy an annuity from Social Security?

[Chuckanut]

I came across this article in Humble Dollar. We endlessly debate the pros and cons of when to start taking SS. Here is another way to look at that decision for those who have the ability to finance their lifestyle without taking SS. Needless to say, it's an individual decision with no one right answer for everybody. I offer this as food for thought.

https://humbledollar.com/2021/09/in..._medium=email&utm_campaign=another-ses-test_7

The author uses as an example a person who delays a $1000 a month benefit for one year and ends up collecting $1080 a month. He also looks at the return of other inflation adjusted annuities on the market.

The paper says you should think of it just that way: You bought a $960-a-year lifetime annuity from the SSA for $12,000. That’s an 8% return. Even better, that $960 a year will increase annually along with inflation. On top of that, if you’re married, you had the higher lifetime earnings and you predecease your spouse, your benefit will be paid to your husband or wife as a survivor benefit.

https://crr.bc.edu/briefs/should-you-buy-an-annuity-from-social-security/

May 2012

The brief’s key findings are:

• Households now retiring need to transform their 401(k) and IRA savings into retirement income.
• One way is to delay claiming Social Security to increase their monthly benefit, using savings to pay current expenses while they wait.
• In effect, they are buying an annuity from Social Security: The savings used is the “price” and the increase in their monthly benefit the annuity income it “buys.”
• Buying an annuity from Social Security is generally the best deal in town, especially in today’s low interest-rate environment.

 

[pb4uski]

The paper says you should think of it just that way: You bought a $960-a-year lifetime annuity from the SSA for $12,000. That’s an 8% return. Even better, that $960 a year will increase annually along with inflation. On top of that, if you’re married, you had the higher lifetime earnings and you predecease your spouse, your benefit will be paid to your husband or wife as a survivor benefit.

While I think looking at the delay SS decision as buying a COLA adjusted life annuity is a good way to look at it, it isn't an 8% return... that's a misunderstanding by the author of the article. If you die after receiving one SS payment after deferring then, in retrospect, it was a poor decision and the return is negative compared to taking early.

Or to use the author's example, if the subject dies even after collecting $1,080/month for q year then their return would still be negative because they have forgone $12,000 to collect $960... it isn't until they have collected for 12.5 years that their return starts turning positive (assuming 0% COLAs).

Below is a table I had readily available comparing deferring from 62 to 70. IIRC average longevity is 82-83 so the expected return would be ~4.5%.... still pretty good pre-tax return for a full faith and credit credit risk... much better than long term government bonds. This also assume that sometime between now and 2034 that Congresscritters will make some remedial changes that will not end up directly reducing benefits.

PIA		1,000
COLA		2.00%
	Claim at 62	Claim at 70	Difference		IRRs
62	8,400		-8,400		N/A
63	8,568		-8,568		N/A
64	8,739		-8,739		N/A
65	8,914		-8,914		N/A
66	9,092		-9,092		N/A
67	9,274		-9,274		N/A
68	9,460		-9,460		N/A
69	9,649		-9,649		N/A
70	9,842	17,434	7,592		N/A
71	10,039	17,783	7,744		N/A
72	10,240	18,139	7,899		N/A
73	10,444	18,501	8,057		N/A
74	10,653	18,871	8,218		N/A
75	10,866	19,249	8,383		N/A
76	11,084	19,634	8,550		-3.23%
77	11,305	20,027	8,721		-1.26%
78	11,531	20,427	8,896		0.32%
79	11,762	20,836	9,074		1.59%
80	11,997	21,252	9,255		2.64%
81	12,237	21,677	9,440		3.51%
82	12,482	22,111	9,629		4.24%
83	12,732	22,553	9,822		4.86%
84	12,986	23,004	10,018		5.39%
85	13,246	23,464	10,218		5.85%
86	13,511	23,934	10,423		6.25%
87	13,781	24,412	10,631		6.59%
88	14,057	24,900	10,844		6.89%
89	14,338	25,398	11,061		7.16%
90	14,625	25,906	11,282		7.39%
91	14,917	26,425	11,507		7.60%
92	15,215	26,953	11,738		7.78%
93	15,520	27,492	11,972		7.95%
94	15,830	28,042	12,212		8.09%
95	16,147	28,603	12,456		8.22%
96	16,470	29,175	12,705		8.34%
97	16,799	29,758	12,959		8.45%
98	17,135	30,354	13,218		8.54%
99	17,478	30,961	13,483		8.63%
100	17,827	31,580	13,752		8.71%

If you look at the differential cash flows then the "return" is positive at 80-82 depending on the COLA. Below is a table that shows the return based on differential cash flows for a $1,000 PIA at 67 and taking at 62 vs 70. Like many annuity purchases, if you live long then the return is attractive and it is decent at most average longevity ages.

 

[qwerty3656]

While I think looking at the delay SS decision as buying a COLA adjusted life annuity is a good way to look at it, it isn't an 8% return... that's a misunderstanding by the author of the article. If you die after receiving one SS payment after deferring then, in retrospect, it was a poor decision and the return is negative compared to taking early.

Or to use the author's example, if the subject dies even after collecting $1,080/month for q year then their return would still be negative because they have forgone $12,000 to collect $960... it isn't until they have collected for 12.5 years that their return starts turning positive (assuming 0% COLAs).

Below is a table I had readily available comparing deferring from 62 to 70. IIRC average longevity is 82-83 so the expected return would be ~4.5%.... still pretty good pre-tax return for a full faith and credit credit risk... much better than long term government bonds. This also assume that sometime between now and 2034 that Congresscritters will make some remedial changes that will not end up directly reducing benefits.

PIA		1,000
COLA		2.00%
	Claim at 62	Claim at 70	Difference		IRRs
62	8,400		-8,400		N/A
63	8,568		-8,568		N/A
64	8,739		-8,739		N/A
65	8,914		-8,914		N/A
66	9,092		-9,092		N/A
67	9,274		-9,274		N/A
68	9,460		-9,460		N/A
69	9,649		-9,649		N/A
70	9,842	17,434	7,592		N/A
71	10,039	17,783	7,744		N/A
72	10,240	18,139	7,899		N/A
73	10,444	18,501	8,057		N/A
74	10,653	18,871	8,218		N/A
75	10,866	19,249	8,383		N/A
76	11,084	19,634	8,550		-3.23%
77	11,305	20,027	8,721		-1.26%
78	11,531	20,427	8,896		0.32%
79	11,762	20,836	9,074		1.59%
80	11,997	21,252	9,255		2.64%
81	12,237	21,677	9,440		3.51%
82	12,482	22,111	9,629		4.24%
83	12,732	22,553	9,822		4.86%
84	12,986	23,004	10,018		5.39%
85	13,246	23,464	10,218		5.85%
86	13,511	23,934	10,423		6.25%
87	13,781	24,412	10,631		6.59%
88	14,057	24,900	10,844		6.89%
89	14,338	25,398	11,061		7.16%
90	14,625	25,906	11,282		7.39%
91	14,917	26,425	11,507		7.60%
92	15,215	26,953	11,738		7.78%
93	15,520	27,492	11,972		7.95%
94	15,830	28,042	12,212		8.09%
95	16,147	28,603	12,456		8.22%
96	16,470	29,175	12,705		8.34%
97	16,799	29,758	12,959		8.45%
98	17,135	30,354	13,218		8.54%
99	17,478	30,961	13,483		8.63%
100	17,827	31,580	13,752		8.71%

If you look at the differential cash flows then the "return" is positive at 80-82 depending on the COLA. Below is a table that shows the return based on differential cash flows for a $1,000 PIA at 67 and taking at 62 vs 70. Like many annuity purchases, if you live long then the return is attractive and it is decent at most average longevity ages.

I've started to look at something like this. Do you adjust the Claim at 70 number for COLA (or inflation)? I.E. if I go onto the SSA site and they say my # at 62 is $2000 and my # at 70 is $3000, and I'm assuming 3% inflation, is my # at 70 really $3000 Inflated for 8 years?

 

[RetireeRobert]

If you die after receiving one SS payment after deferring then, in retrospect, it was a poor decision and the return is negative compared to taking early.

But when one buys an an actual annuity from an insurance company and dies after receiving one payment, wouldn't that also turn out to have been a bad decision? Either case, real insurance company annuity or SS, one is gambling about their actual life expectancy vs average life expectancies per the charts.

 

[pb4uski]

But when one buys an an actual annuity from an insurance company and dies after receiving one payment, wouldn't that also turn out to have been a bad decision? Either case, real insurance company annuity or SS, one is gambling about their actual life expectancy vs average life expectancies per the charts.

It would, but most insurers offer SPIAs with a refund feature or with a certain number of years of payments guaranteed and the difference in the payments is negligible... so IMO it would be foolish to buy a life annuity without a guaranteed payout of some sort or a refund feature.

You can't get that with SS.

 

[RetireeRobert]

It would, but most insurers offer SPIAs with a refund feature or with a certain number of years of payments guaranteed and the difference in the payments is negligible... so IMO it would be foolish to buy a life annuity without a guaranteed payout of some sort or a refund feature.

You can't get that with SS.

But those SPIA's options come at cost of lower guaranteed monthly payouts. So you are doing an apples to oranges comparison in dissing the "wait for SS" strategy.

 

[pb4uski]

But those SPIA's options come at cost of lower guaranteed monthly payouts. So you are doing an apples to oranges comparison in dissing the "wait for SS" strategy.

I wasn't dissing anything other than pointing out that and "8% return" was a fallacy. Other than that misstatement I pretty much agree with the article and that viewing deferring SS as buying a COLA adjusted annuity from Uncle Sam is a good way to frame the decision.

 

[pb4uski]

I've started to look at something like this. Do you adjust the Claim at 70 number for COLA (or inflation)? I.E. if I go onto the SSA site and they say my # at 62 is $2000 and my # at 70 is $3000, and I'm assuming 3% inflation, is my # at 70 really $3000 Inflated for 8 years?

Yes, if you defer beyond FRA, each year your get 8% of your PIA and any COLA increase declared.

 

[all4j]

I agree with the 8%/year being misleading...actually just wrong. The main point I agreed with from the article was that the decision is often emotional, not financial (full disclosure -- I didn't read the 2012 article it referred to). There are sleep at night considerations as well as tax/estate planning, sequence of return risk, et al I get that most people don't want to wade through the various ifs/ands, but that is where the simple comparisons fall apart. Situations are just different & no one size fits all answer