AP Photo: Bradley C. Bower

As the leading edge of the baby boomers generation is now turning 66 years old, their ideas of wealth during retirement is changing. No longer are we looking for “a number,” or target for accumulating a lump sum of cash. Instead, boomers (and possibly Gen X that follows) want an income stream that is reliable, predictable and lifelong. And what better income stream could one want than one backed by the strongest government in the universe? (Albeit, it may be the cleanest dirty shirt in the financial wardrobe.)

Many 401k(s) have gone virtually sideways after inflation the past 12 years, and ownership of individual stocks is generally not allowed in such ERISA plans. For those under the age of 65, piling as much money as one can into high-quality, high-dividend-paying equities has proven to be the best inflation-protected income stream. Reinvesting those dividends in a free dividend reinvestment plan (aka DRIP), and then taking the dividends in the form of quarterly cash payments is a no-brainer.

Since 1946, large cap stocks have returned 6.6 percent above inflation while intermediate bonds (and bond funds) have hammered out just 2.2 percent above inflation. Caveat emptor: With the yield on 10-year Treasury bonds touching an all-time unbelievable low of a measly 1.33 percent, the chance that interest rates will rise and slam your bond portfolio into oblivion should you want to cash them out prior to maturity (likewise for both fixed and indexed annuities with a Market Value Adjustment) is quite likely.

Finding alternatives to bonds and fixed or indexed annuities to produce income for future retirees is paramount. But what about the best and cheapest annuity in town? Buy your annuity from Social Security. Not only is it quasi-inflation protected with its cost of living adjustments (COLA), its issuer is a pretty sure bet to be the last man standing in case we suffer a global economic meltdown. How does one buy an annuity from Social Security?

Delay to 70

By paying expenses and bills from current savings or existing investments and wages, thereby delaying until age 70 the taking of Social Security benefits. Delaying Social Security from age 65 to age 70 can increase the monthly income by as much as 40 percent. “Buying” an annuity from Social Security is generally more attractive than buying a “commercial” one from an insurance company. The advantage of buying an annuity from Social Security is especially attractive when interest rates are this low. 

Living on the interest generated from bonds is nigh impossible currently. The “opportunity cost” of using up existing savings and deferring Social Security has never been cheaper. And the amount of implied interest earned each and every year by delaying income is 8 percent. Yes you read that correctly: a whopping 8 percent. Maybe even tapping into 401(k) funds to delay having to take Social Security income benefits should be considered before recommending another fixed or indexed annuity, at least until interest rates rise. That might be the best deal in town.

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