Life, Death and Social Security Benifits

Posted: Oct 02, 2008 12:01 AM

Q: I am 69 years of age. I have been receiving Social Security benefits for the past four years. My current monthly payment is $1,888 per month. If I give back my total benefits of $84,960, Social Security will increase my monthly payment to $2,414.80 (a gain of $526.80). What is the actual percentage gain? Is there any investment product that will give me the same or better rate of return? Social Security claims that it will take me 17.2 years to break even. -- E.B., Andover, Mass.

A: Your annual increase amounts to 7.4 percent on your $84,960 commitment. It also indicates a payback period (exclusive of inflation increases) of 13.5 years, not the 17.2 years suggested. The payback period will be shorter if you adjust for inflation increases. Since you will receive inflation adjustments, however, it will take 13.5 years to recover the real purchasing power returned.

If you started taking Social Security benefits at your full retirement age, which was 65 years and 4 months for those born in 1939 (see full retirement age table here:, your benefits increase 7 percent for each year of delay. Those born in 1943 or later receive increases of 8 percent for each year of delay (see table here:

According to the U.S. Life Tables from the National Center for Health Statistics, a 69-year-old man now has a life expectancy of 14.1 years, if he is white. This means you have a 50 percent chance of living longer than 14.1 years and a 50 percent chance of dying earlier. If you tried to buy the same monthly income for life from a private source like Vanguard, with inflation adjustments, it would cost slightly less, $81,246. The Vanguard product, however, does put some limitations on the inflation adjustment. You should also get a quote from Elm Annuity, In any case, you should look before you leap.

As I have pointed out in other columns, delaying Social Security benefits works best for married men who are likely to be survived by their younger spouses because the joint expectancy of a couple is much longer than the life expectancy of an individual.

Q: Would you address again the lost earnings if one dies while waiting for the Social Security benefits to max out, versus taking it once full retirement age is reached? Also please address the break-even points on taking benefits at age 62 versus waiting until full retirement age, assuming no constraints on monthly benefits due to excess earnings. -- D.S., Kingsland, Texas

A: The best "yield" for delaying Social Security benefits goes to couples where the husband has the better earnings record and the wife is younger. That's a lot of people, even in a society that no longer models itself on Ozzie and Harriet. The reason for the big payoff is simple -- the spousal benefit gets a big uptick on the death of the husband. This ensures that the increase in benefits will be enjoyed over a joint life expectancy rather than a single life expectancy.

For those entering retirement age, benefits now increase at about 7.5 percent a year to 8 percent a year. Since Social Security benefits are indexed to inflation, you will get the real purchasing power deferred back in about 12.5 to 13.33 years. The life expectancy of a typical male at 62 is 18.9 years, while the life expectancy for a 65-year-old male is 16.1 years. Life expectancies for women at those ages are 22 years and 18.9 years, respectively.

The payback period analysis isn't very useful because it involves speculating on something we don't know -- when we will die. The odds, however, clearly favor deferring taking benefits.

The race and gender element in this can change your decisions. While white males at 62 can expect to live 19 years, black males of the same age have life expectancies of 16.5 years, a full 2.5 years less. That 16.5-year expectancy is still longer than the break-even period, but it makes deferring benefits less of a slam-dunk. Women, on the other hand, have longer life expectancies than men, so the odds are even better for them.