Wise tidings at year’s end:Think about your mortality

December 5, 2013

Year-end festivities are approaching, with Hanukkah lights nearing their peak, Christmas lights going up, and the New Year’s celebration almost upon us. So what better time than the season of light is there to talk about . . . mortality?

No, I’m not raising this gloomy topic just to be contrarian during a time of widespread celebrations. I’m raising it because this is the time of year that people plan investment strategies, and one of the most interesting decisions you may have to make involves estimating how long you’re likely to live.

This decision doesn’t involve stocks or bonds. It involves Social Security retirement benefits.

Here’s the deal — in grossly simplified form, which is the only way to deal with Social Security questions without bogging down. If you have the requisite 10 years of employment (or have been married long enough to someone with the requisite 10 years), you can begin drawing Social Security retirement benefits at any time from ages 62 to 70. The earlier you begin taking money, the less money you get a year. The later you begin, the more you get.

For example, if you start taking money at 62, you get 75 percent of your normal retirement benefit. If you start at 66, you get 100 percent. At 70, you get 132 percent. Each year you wait from 62 on increases your benefits by about 8 percent.

Social Security doesn’t care when you begin taking your money because people getting lower payments for longer periods cost the system the same as people getting highers payment for shorter periods. But when you take your money can make a huge difference to you and your survivors, as you’ll see.

There are drawbacks to taking benefits at 62 if you’re employed (simply put, part of your benefit is deferred if you earn more than a certain amount — currently $15,120 a year — from working). At 66, however, there are no penalties. That’s when the decision becomes purely economic.

The conventional wisdom is to wait until you’re 70 to draw benefits if you can afford to, because that 8 percent increase in payments for each year you wait is a kind of longevity insurance. If you live to your mid-80s or longer, you would do better to wait to start getting money. The rough math: If, instead of getting 100 percent at 66, you start collecting 132 percent at 70, it would take 12½ years for that 32 percent difference to equal the four years of benefits that you would have collected starting at 66.

So if you live to your mid-eighties or longer, you win big. But of course there’s a risk: If you don’t collect anything and you die at, say, 69 and 11 months, you (and your survivors) get nothing. It’s what’s known in the insurance biz as mortality risk.

Once you’re 66, it’s hard to give up 8 percent a year, especially these days. But there’s that pesky mortality risk: Both my parents died in their early 70s. So let me show you the middle path that my wife and I decided to follow. We began to collect Social Security two years ago, when I turned 67. (She’s somewhat younger than I am.) So have we walked away from the prospect of higher income? Not totally.

We’ve been taking our monthly Social Security benefits and investing them, primarily in individual dividend-paying stocks. If we can earn 4 percent or 5 percent a year from these investments, it makes up for a good part of the 8 percent Social Security increase that we’re forgoing. And who knows, maybe we’ll earn even more. Meanwhile, it hedges our mortality risk and leaves our family better off if one (or both) of us doesn’t make it to our 80s.

With luck, I’ll be able to write a follow-up column 15 years from now and let you know how our hybrid Social Security strategy has turned out. But in deference to the season, I’ll stop being depressing. Enjoy the year-end lights.

Sloan is Fortune magazine’s senior editor at large.

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