With a projected COLA increase this coming year of 10.5% on top of last year’s 5.9% I’ve had a number of calls from CPA’s, Advisors and Clients as to the wisdom of waiting until 70 or claiming early! There is 2 ways to think about it, so let’s look at it from 2 different perspectives.
#1 Simplistic View – I get a BIGGER Increase in monthly benefits
We both claimed, you claimed at 62 and I claimed at 70
Your check is $2,000 and mine is $4,000 since I waited until 70
10% increase means next year you receive $2,200 where I get $4,400 /mo. or $2,400 more per year for life and my spouse inherits a much greater check as well upon my demise. All future COLA’s actually benefit me more because I have a greater compounding COLA adjusted benefit. The Breakeven between the 2 strategies was initially 10 years due to COLA, I shorten the breakeven to less than 10 years.
#2 Into the Weeds – Dissecting the numbers
John Doe just turned 62 born in July 1960 his PIA is $3,000 / mo.
Jody Doe will turn 60 in August and her PIA is $2,000 / mo.
ZERO COLA’s for LIFE – Totally Unreasonable since COLA’s have averaged 2.6%
2% COLA for life – which is a number I’ve used in all my assumptions for last 10 years
4% COLA for life – I don’t think that is a reasonable annual amount
0% COLA (Doe 0% COLA.pdf)
|Checks at age 70||$2,113 vs $3,720||Breakeven 81.6|
|John dies at 85 JODY||$2,475 vs $3,720||+ $1,245/mo.||+ $14,940/yr|
|JODY dies @ 95||$307,000 Difference|
|Long Life 10 years||$503,000 Difference|
2% COLA (Doe 2% COLA.pdf)
|Checks at age 70||$2,475 vs $4,358||Breakeven 80.6|
|John dies at 85 JODY||$3,980 vs $5,982||At age 90 checks $4,948 vs $7,437|
|Jody dies @ 95||$580,100 Difference in favor of delaying|
|Long Life 10 years||$1,200,000 Difference in favor of delaying|
4% COLA (Doe 4% COLA.pdf)
|Checks at age 70||$2,891 vs $5,090||Breakeven 79.6|
|John dies @ 85 JODY||$6,343 vs $9,533||At age 90 checks $9,764 vs $14,675|
|Jody dies @ 95||$1.020 million Difference in favor of delaying|
|Long Life 10 years||$2.220 million Difference in favor of delaying|
As you can see a higher COLA actually magnifies the importance of waiting until age 70 before claiming!
For you numbers crunchers I’ve attached the actual annual numbers based upon 0 – 2 – 4% COLA’s and for grins I ran the same numbers assuming a 5% reinvestment rate. When running those scenarios, the breakeven is oblivious longer, but the end results once again are much more dramatic in favor of delaying until 70 before claiming!
As always it is so important to run the numbers, discuss health issues & family history before deciding when to claim benefits. I had a client call me while writing this newsletter to discuss the analysis I prepared for him several years ago. He was contemplating claiming at 66, while waiting and preserving his significant IRA until RMD at age 72. I asked him a simple questions;
“Are you earning 8% Guaranteed on the assets in your IRA?”
“With a National Debt of $28 Trillion do you think tax brackets will increase?
“With the markets down YTD, might it make sense to draw down on IRA assets before the markets correct and convert to Roth IRA’s or Non qualified accounts, thus no longer having to worry about RMD’s?”
Ya’ll have a great month, keep cool and pray for rain!