It will be hard for many to imagine, but some retirees don't really need their Social Security benefit. They may have hit the lottery or scored an inheritance, had stunning investing results or simply found their expenses aren't as high as expected.
Still, the benefit has value that can be put to use in some way. Unlike true investments, it cannot be passed to heirs other than a spouse. So what's the best way to put it to work? Should you, for example, take the benefit and invest it, or spend it in place of some other income?
"This question comes up quite often because of the large number of baby boomers thinking about retirement," says Jeff Eglow, senior vice president of investments at Newbridge Securities Corp. in Boca Raton, Florida. "Because of the crisis in 2008, many of these people want to rely on a guaranteed income source, an income source they can't outlive."
Social Security benefits grow according to the beneficiary's years of work, income and age. While many people start receiving monthly payments as soon as they are eligible at age 62, experts urge delaying as long as possible if the benefit isn't needed right away. That's because the payment grows by 8 percent a year until age 70. A beneficiary who could get $2,000 a month at the "full retirement age" of 66 would get just $1,500 at 62 but could get $2,640 at 70.
Obviously, a delay means not getting payments for a number of years, offsetting the higher payment to start later. Generally, the longer you live the more likely you'll come out ahead by waiting, with the bigger income more than offsetting the money lost in the meantime. The benefit is like a fixed nest egg to be distributed over a long period or a shorter one.
Generally, recipients who live past their late 70s collect more by delaying the start. But the break-even calculation gets more difficult if you assume the payments start early and are invested instead of spent. Unknowns include the investment return, damage from inflation and how long the recipient will live. Search for "Social Security calculators" for help.
A beneficiary who doesn't need the benefit can collect it anyway and invest it. But that isn't always a smart move, according to Joshua Escalante Troesh, owner of Purposeful Strategic Partners in California and business professor at El Camino College.
"If a retiree doesn't need their Social Security benefit, it is unlikely to be advantageous for them to invest it, either in stock or an insurance product," he says. "For the typical retiree who hasn't started receiving Social Security and is younger than age 70, delaying Social Security will provide a much greater financial benefit over their lifetime than claiming Social Security and investing."
This is because it is so hard to find investments offering the same low risk, guaranteed 8 percent annual growth. Stocks are obviously risky for manyh retired investors and bond yields may not grow even enough to keep up with inflation. Immediate and deferred annuities can provide lifetime income but reduce the payout dramatically if inflation protection is added to the policy.
"If the retiree is older than age 70, or has already started receiving their Social Security benefit, then the best thing would likely be to spend the Social Security money and minimize withdrawals from any 401(k) or (individual retirement) accounts they may have," Troesh says.
From a tax perspective, he says, it's better to spend the benefit than to take money taxed as income from traditional investment vehicles such as an IRA or 401(k). Most recipients are taxed on only 50 percent to 85 percent of their benefit, while 100 percent of the withdrawal from one of those retirement accounts is taxed.
While investing options are tricky to evaluate, one thing is clear for all older investors, says Pedro M. Silva of ExecutiveProvo Wealth Management Group in Shrewsbury, Massachusetts: Since the benefit stops growing at that 8 percent once the beneficiary reaches 70, it makes no sense to delay the start past that age.
A retired investor who doesn't need the Social Security benefit has other options too.
"For those who are fortunate enough to not need this money, we often encourage them to help their adult children or fund their charitable causes," Silva says. "If adult children could use some help with day care costs, a home down payment, new garage doors, that is a great use for this money that is adding value and improving someone's life today," he says.
These donations could be stopped if money got tight later, keeping future benefits in reserve for unanticipated problems like increased medical costs or kept in a fund to offset a financial or an investment setback.
James Enriquez, a financial advisor with Strategic Insights Financial Planning Group in McAllen, Texas, offers another alternative.
"We have used excess benefits to pay premiums of life insurance policies for clients wishing to leave their heirs a bigger inheritance," he says. Not only can the policy effectively pass money to heirs, while the Social Security benefit cannot itself be passed on, he says the death benefit heirs receive is tax free.
Other experts warn, however, that committing the benefit to a big insurance premium must be done with care. If something goes wrong, the policy could lapse if the benefit is used for living expenses rather than premium payments.
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