This 7% Return Would Only Come To Those Who Wait


&l;img class=&q;dam-image getty size-large wp-image-52182315&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;638&q; data-width=&q;960&q;&g; (Photo by William Thomas Cain/Getty Images)

Would you rather have $700 now or $1,000 later? That&a;rsquo;s the question at the heart of a new analysis looking at social security benefits and the advantages of holding off on&a;nbsp;cashing that first check.

For anyone approaching retirement, the study&a;nbsp;gives insight into the classic &l;a href=&q;; target=&q;_blank&q;&g;&a;ldquo;marshmallow test,&a;rdquo;&l;/a&g; where &l;a href=&q;; target=&q;_blank&q;&g;psychologists&l;/a&g; offered children a choice between receiving something desired now (initially that famous marshmallow) or&a;nbsp;more later. The un-shocking finding underscores what&a;nbsp;some of us may observe in ourselves: Most of us have trouble waiting, even when we understand the value of postponing. It is literally taxing. Granted, deciding about when to collect&a;nbsp;social security income is a bit higher stakes and has more consequences than deciding when to eat a&a;nbsp;snack, but it taps into&a;nbsp;some of the same decision-making skills&a;nbsp;required in weighing how to choose between less now and more later. For most, retirement requires that income now. But Pew&l;span&g;&a;rsquo;&l;/span&g;s analysis provides some analytical muscle, along with a potential strategy that could help more retirees wait longer and potentially capture higher income later.

How so? The analysis, conducted by the&l;a href=&q;; target=&q;_blank&q;&g; Pew Charitable Trusts and released this month&l;/a&g;, shows that putting off receiving social security income even by just one year, based on likely actuarial projections, could generate as much as a 7% or 8% increase in benefits for recipients. Yet &l;a href=&q;; target=&q;_blank&q;&g;prior studies&l;/a&g; show a high percentage of retirees have elected to collect benefits at age 62 in the past. The question is: How do you get retirees &a;mdash; especially those who may lack alternate income to hold off?

Pew identifies a promising strategy&a;mdash; especially valuable for lower income retirees &a;mdash; in the tapping into the growing number of auto-IRA programs available for people who lack retirement plans at work. These are now&a;nbsp;in development in five states including California, Connecticut, Illinois, Maryland and Oregon. And as a plus, it&a;rsquo;s a simple plan to execute. Those who have an IRA would simply delay collecting social security benefits and draw income from the IRA instead at age 62 &a;mdash; for one year or longer. (Alternately, retirees could also adopt some of the more traditional methods to delay collecting social security income such as by working longer or tapping other assets if available.)

The programs at five states, and potentially at more that are considering introducing auto IRAs, already aim to boost participation rates and amounts using auto-enrollment and auto-escalation, psychological techniques shown to be effective at getting people to start saving and keep saving over time. The approach requires no complex calculation: retirees can simply attempt to replace whatever social security benefit they would receive by withdrawing that same amount monthly from an IRA. Or they could convert savings to an annuity or use it as savings.

In theory, such a plan would benefit many investors. Pew, together with the Social Security Administration, used a modeling program (Modeling Income in the Near Term, or MINT) to simulate an investment scenario assuming the state auto-IRA plan had a 3% default contribution rate. In this case, 3% of an employee&a;rsquo;s salary would be invested in the Auto IRA starting in 2019. (The model also took into account workers&a;rsquo; preferences: they can opt out and some would likely change the contribution amount.)

But notably, the model shows by 2050 nearly 40% of participants could delay claiming Social Security by a year or more and 20% could for at least two years, according to Pew. Replacing that income by withdrawing from an IRA could increase Social Security benefits by 7% to slightly more than 8% for each year they delay based on likely life expectancy calculations that take into account the number of years most retirees would receive the income, according to Pew. (As an example, someone who begins collecting Social Security benefits at age 62 would receive $700 monthly, versus $1000 if they waited until age 67.)


To be sure, it doesn&a;rsquo;t take into account personal preferences and an individual&a;rsquo;s health. As Pew notes, some people may yet decide to take Social Security payments at age 62 anyway and others may be skeptically watching Social Security&a;rsquo;s expected financial shortfall anticipated in 2034 unless Congress acts.

But at a time when 12 other states are considering legislation permitting auto-IRAs, there has been some question about to what degree modest IRA balances could help retirees, according to Alison Shelton, senior research officer with The Pew Charitable Trusts retirement savings project. This analysis suggests people at all income levels may benefit, she says.

&a;ldquo;They show small savings can have a big impact,&a;rdquo; Shelton says.&l;/p&g;

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