Tuesday, January 15, 2008

Conventional wisdom on retiring at 62 challenged; seniors feel need to accumulate more wealth before "retiring"

USA Today on Monday, Jan. 14 had an interesting story about the common advice to start social security at 62 (with a “protective application statement”). The story, by Sandra Block, is “Boomers’ eagerness to retire could cost them: Filing for Social Security at 62 raises risk they’ll outlive their money,” link here. The USA Today website header banner above this page is “Turning 62: Day 1: The retirement book begins.”

The article goes on to note that SSA believes the “break even” lifespan for age 62 retirement is 77. But lifespans are increasing more rapidly than has ever been expected, partly because anti-cholesterol and heartbeat regulating drugs are so effective (and have often become much less expensive in generic mode), and Medicare has extended lives extensively with lifesaving surgeries (such as coronary bypass grafts), especially for women, who still outlive men. SSA benefits are supposed to be determined actuarially according to expected lifespans and “present value” formulas. It isn’t clear if they will be expanded, since there is so much concern about the eventual fiscal stability of the Social Security Trust Fund. Furthermore, many early retirees are in circumstances that, because of other income, they may pay taxes on up to 85% of their benefits. Retirees may want to consider staggering their incomes (age of beginning SSA collection, pension collection, and 401K payouts). Financial planners may have a lot of work to do in developing algorithms to maximize income. Corporations tend to plan on employees’ starting Social Security at 62 by the way they design social security bridges and offsets in their pension programs (for those companies that still have them), and this really complicates the financial strategy for the retiree. This corporate policy needs to change, too. Life insurance companies may have to reconsider how they hire agents, focusing on analytical and mathematical skills rather than just the social skills of “getting leads.”

A "Financial Futures" story on page F01 (“Business”) in the Sunday Jan. 13, 2008 Washington Post by Martha M. Hamilton reads “It Might Take 10 or 12 Times Salary for Retirement,” link here. That is, people should not retire until they have accumulated 10 times their annual income. That idea could generate the notion that more seniors go into sales activity, selling “lifestyle” (like retirement real estate or long term care insurance) to their peers. Many life insurance companies have separate subsidiaries for “high net worth individuals” because they find they can cross-sell more easily to these persons when set up this way.

Update: Jan 17, 2008

Kathy Chu in USA Today has a story "How Do You Make a Lump Sum of Your Life Savings Last?", story here.
The story mentions a proposal by Michael Huckabee to buy out current retirees with lump sums. At age 62, a typical lump sum could be around $300000. Some retirees say that they take the "protective coverage" at 62 out of a belief that they would be grandfathered if a political catastrophe cut them off. Some say that the social security tax wage base will have to be raised (over $102000) and some say that the portion of social security tax raised could raise over the 85%, and others fear that earnings limits rules on early retirement could get stricter. Another threat is that Medicare coverage could get much weaker as people live much longer and costs for heroic life-saving or life-extending treatments continue to increase.

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