Scott Burns: It pays to wait for Social Security
In the casino of life, you’ll do a lot better playing at the Social Security table than at the blackjack table. So it’s a very good way to convert some of your savings into a life annuity from the government.
Q: Because I am approaching 65, I get invited to listen to a number of “retirement specialists” make presentations. Sometimes I get snacks and/or a meal. Here is what I believe several of them are saying:
Every year that you defer your Social Security benefits, the benefits increase at a guaranteed 8 percent.
So if I live for four years by cashing in poorly productive equity investments, my Social Security at age 70 will be about 32 percent more than it would be if I started receiving Social Security payments at age 66, when I retire.
Since the equity investments I am referring to have not gained in value, I should not have to pay any taxes on their sale.
Of course, life expectancy is a factor here. If I knew I would die at age 68, I would start drawing Social Security right away. But both my parents lived into their 90s, and I am currently in good health. Deferral seems like a no-brainer. Is it?
A: What you are being told is correct and useful.
Your Social Security benefits do increase by 8 percent a year for each year of deferral after your full retirement age. (The rate of increase is somewhat smaller for deferral from age 62 to full retirement age.)
The “payback” period, measuring in dollars of constant purchasing power, is 12.5 years.
While that may seem like a long time, the life expectancy of an American male at age 66 is 16.3 years, and he also has about a 67 percent chance of living for at least 12 years.
Put it this way: In the casino of life, you’ll do a lot better playing at the Social Security table than at the blackjack table. So it’s a very good way to convert some of your savings into a life annuity from the government.
Q: I am looking to add some fundamental index funds. Is the only exchange-traded fund option for these the PowerShares, such as PRF? What about the offerings from Schwab, such as SFLNX?
A: The PowerShares fund is an exchange-traded fund, and the Schwab fund is a mutual fund.
But that’s no longer an issue: Schwab recently announced an expansion of its Fundamental Index-based funds, adding six new exchange-traded funds.
Five of these funds parallel the five Fundamental Index mutual funds Schwab offers.
The new Schwab Fundamental U.S. Broad Market Index ETF (ticker FNDB) is the only one not currently available as a mutual fund. The Schwab Fundamental U.S. Large Company Index ETF uses the same basic index as the competing PowerShares ETF.
It is highly likely that the biggest difference between the Schwab ETF for large companies and the corresponding PowerShares ETF is that the Schwab ETF is somewhat less expensive.
Currently, PowerShares, which entered the ETF market in 2003, is the fourth-largest provider of ETFs, after BlackRock, State Street and Vanguard. Schwab entered in 2009 and now ranks 10th.
Copyright 2013, Universal Press Syndicate