The United States Government Accountability Office recently released its long-awaited (and long!) report on retirement income — Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices. The GAO is an independent, nonpartisan agency that works for Congress and investigates how the federal government spends taxpayer dollars. The headline conclusions of the report are pretty straightforward: Consumers should delay taking Social Security and buy more annuities.
To conduct the study, the GAO created sample retiree profiles at varying income levels and then asked various experts within the financial services industry, academia and an unnamed retiree interest group what they would do to protect their income over the long haul. The GAO was careful not to offer advice directly, but describes the expert advice in some detail and does not offer conflicting viewpoints, allowing us to see the apparent GAO view by inference. The experts recommended familiar strategies: (1) retirees should delay the start of their Social Security benefits; and (2) retirees should consider buying income annuities to cover some basic expenses for the rest of their lives.
The GAO began by stating the obvious: “The risk that retirees will outlive their assets is a growing challenge.” For consumers facing fewer and at-risk traditional pension plans, increased life expectancies, highly volatile financial markets and substantial losses to home equity over the recent past, “growing challenge” seems like a major understatement. Indeed, a husband and wife who are both 65 years old have roughly a 47 percent chance that at least one of them will live until 90 and, according to data from the Employee Benefit Research Institute, roughly half of near-retirees today are likely to run out of money and not be able to cover their basic expenses and uninsured health-care costs later in life.
Given that difficult reality, delaying Social Security to obtain a better payout makes great sense. Social Security allows recipients to take reduced payments as early as age 62 while providing “full benefits” at age 66 for those born from 1943 to 1954 and extending to age 67 for those born in 1960 or after. Social Security also provides for increasing payouts for those who delay taking benefits up to age 70. Since monthly benefits received at age 70 are increased by at least 32 percent compared with taking them at age 66, the study recommends waiting. But this is a choice that is rarely selected. In fact, nearly three-quarters of people begin taking Social Security payouts prior to age 65.
Obviously, delaying Social Security is good advice for those who can afford it or who have up-to-date skills and good health. In 2010, more than 29 percent of Americans aged 65 to 69 worked at least part-time and nearly 7 percent aged 75 or older were employed. But simply working longer is not always an option as the vagaries of health and the job market cannot be controlled. Sadly, the real picture does not always look like that depicted in retirement planning commercials.