Know how to get a great deal on an annuity today? Tap your 401(k) or IRA for living expenses in your first few years of retirement so you can postpone taking Social Security.
Most people start their Social Security benefits as early as possible, at age 62, or at least by their "normal" retirement age, which is the age when they're entitled to "full," or unreduced, benefits (currently 66 or 67 years old, depending on when you were born).
But for every year you defer past that, up to age 70, your Social Security benefits will rise by 6% to 8%. Those are real, inflation-adjusted rates of return, guaranteed by the U.S. government. Where else can you get a return like that these days with real interest rates close to zero?The real fun begins for married couples;
Jane and Dan could claim Social Security at ages 62 and 66, respectively, and spend $50,000 of their $150,000 nest egg—about $5,000 in each of the first three years and about $1,000 a year for the rest their lives—giving them about $33,000 a year in income. (This analysis assumes Jane has a $5,000 pension starting at 65.)
But by deferring Dan's Social Security start-date by two years and spending only $45,000 of their 401(k) and IRA assets—all in the first three years of retirement—the couple could generate household income of nearly $35,000 a year, an increase of 6%. Moreover, the income of the surviving spouse rises by more than 8%.
Note: It makes little difference when Jane starts her Social Security benefits, but maximizing the higher of the two benefits—in this case Dan's—is a good deal for the couple and a great deal for the surviving spouse, whose benefits will be based on the higher amount.
Congressman Sonny Bono--'People like me, know there are people who will game any system.'--RIP.