Traditional retirement planning often advises holding on to your market investments as long as you can. But a close look at the Social Security rules makes a strong case that you'd be better off cashing in those 401(k)s if doing so will delay your need to begin taking Social Security benefits.
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Looking differently at Social Security makes special sense these days. With interest rates near zero, bonds and other so-called "safe" investments are producing very low yields. The stock market has produced no real gains for the past 10 years. And its volatility makes it a risky place to entrust retirement funds.
Social Security, by contrast, has very little risk. You may begin receiving benefits at the age of 62. But if you do, you will be leaving a lot of money on the table. For people nearing retirement age today, taking benefits at the age of 62 will pay them only 75 percent as much money as if they wait until they turn 66, which is their legal "full retirement age" under Social Security rules. And each additional year benefits are delayed, their payments will rise another 8 percent.
The annual increases end when a person turns 70. Claiming Social Security at that time produces a benefit that is 132 percent of its level if the person began taking benefits when they turned 66. Even better, Social Security has an annual cost of living adjustment (COLA) that adjusts benefits upward to reflect rising consumer prices. So, that guaranteed annual increase is protected from most of the impact of inflation. Rising medical costs have so consistently outstripped overall inflation that some advocates say the COLA needs to be sweetened.
Further, if you take Social Security benefits between the ages of 62 and 66, any outside income you earn may reduce your Social Security payments.
Longevity, of course, is the big wild card in this decision. Anyone who delays benefits and then dies at a young age will not come close to "breaking even" on Social Security. And if they've cashed in retirement accounts so they can afford to delay taking Social Security, their heirs won't be too happy, either. You can convey the holdings of retirement accounts in your will. You can't pass on unused Social Security benefits (although your spouse may benefit by claiming part of your benefits in the form of survivorship payments).
Increasingly, however, the longevity odds favor longer, not shorter, lives. Use the Social Security longevity calculator to see for yourself. The average man turning 65 will live another 18 years; an average 65-year-old woman will live another 20 years. And these are averages. If you don't have a family history of health problems or a chronic condition yourself, you will probably live longer than these averages. If you are not seriously overweight and get regular exercise, you will live longer still.
The continuing recession drove record numbers of 62-year-olds last year to claim Social Security as soon as they could. There is no way to know how many of them made this decision while keeping other retirement assets salted away.
But if you're faced with this choice, don't ignore the appeal of viewing Social Security as perhaps your most valuable asset. Would you rather have $750 a month today, or $1,000 a month in four years (adjusted upward for inflation), or $1,320 a month when you turn 70?
[See 10 Trends in Longevity.]