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For
most seniors, waiting until age 70 before collecting social
security, as opposed to taking a smaller amount earlier, is
an excellent investment. A typical senior who could draw
$1350 a month at age 62, would see the draw increase to
$2376 at age 70. Yet more than 2 of every 3 workers eligible
for social security take it early. The major reasons are
time preference, risk of non-payment, and income shortage.
The last may be the most important, and for homeowners at
least, it is the easiest to remedy.
Most
people prefer money now to money in the future, even when
all uncertainty connected with receiving money in the future
has been eliminated. This time preference seems to be
built into the human psyche. In addition, receiving money
now eliminates the risk that the payments promised in the
future will not actually be paid.
Interest
rates reflect both time preference and risk of non-payment.
One way to view the decision about taking social security early or late is to ask whether the implied interest rate received by the senior who waits is worth the risk? That rate is about 7-8%, meaning that the payment to the senior who waits rises by 7-8% a year. I view that as more than adequate compensation for the risk, which is very unlike the risk of not being paid on a note or a bond.
The
only seniors for whom waiting to begin social security would
be a poor investment are those who anticipate a relatively
short life span. Unlike a bond, where non-payment result s
from default by the promisor, on deferred social security
non-payment results from the death of the recipient. If you
die before reaching 70, you have left all the money you
could have drawn on the table. In fact, if you delay until
age 70, you don’t break even in the sense of recovering all
the payments you did not receive between 62 and 70 until you
have collected for 11-12 years – or until you are 81 or 82.
After that, it is all gravy.
It is
doubtful, however, that the decision to begin receiving
payments early is mortality-based in more than a handful of
cases. Few people know how long they are going to live.
The
counterpart to the mortality risk involved in taking the
payments late is the poverty risk associated with taking
payments early.
The payments to those who begin early are lower for the
remainder of the senior’s life, which can mean the
difference between poverty and comfort in old age. Many
seniors don’t give that a lot of thought.
In my
scheme of values, avoiding poverty risk is more important
than avoiding mortality risk. If I don’t avoid poverty risk,
I may be forced to endure poverty in my old age. If I don’t
avoid mortality risk, in contrast, I won’t be around to
lament the money I didn’t draw.
Probably the most important factor inducing seniors to begin
drawing social security early is a need for more income at
the time. Relieving their current income shortage outweighs
the risk of incurring an even worse shortage in the future.
However, seniors who have some equity in their home can use
a HECM reverse mortgage to draw income while they defer
taking social security.
I
recently revised the HECM calculator on my web site so that
it can easily be used to determine whether there is enough
equity to provide the income- supplement required by the
senior for a limited period. The calculator will indicate
your HECM borrowing power, which depends on your age, the
value of your house less any existing mortgage debt, and the
HECM interest rate and settlement costs. It will also
calculate the borrowing power required to generate the
income you need for the period until social security kicks
in.
For
example, if you are now 62 and want to draw $1,000 a month
for 8 years, at the interest rates on June 30, 2014, you
need equity in your home (property value less mortgage
balance) of approximately $156,000. This would use up all
your HECM borrowing power. Or you could draw $500 a month
and use only half of it. If your home equity was $312,000,
you would use only half of your borrowing power to draw
$1,000 a month for 8 years, leaving the remainder as an
unused credit line that could be accessed anytime in the
future.