Social Security can be viewed in some ways as a deferred income annuity and it is a very good one, according to Robert Klein, president of Retirement Income Center.
Although the financing for Social Security and a deferred income annuity are not the same, the way the payouts are calculated makes the two similar and makes Social Security a better investment, Klein says.
Klein’s Retirement Income Center (www.RetirementIncomeCtr.com) is a registered investment advisor, based in Newport Beach, Calif. Klein specializes in retirement income planning. He also is sole proprietor of Robert Klein, CPA. Klein writes retirement Income Visions (www.RetirementIncomeVisions.com), a blog about strategies for creating and optimizing retirement income. He also is a contributor to The Wall Street Journal’s “RetireMentors MarketWatch.”
Klein argues, “It turns out that in today’s low-interest rate environment, Social Security is inarguably the ultimate deferred income annuity.”
To show that Social Security is actually a better deal, Klein uses his own situation as an example. Over his working career, Klein and his employers have paid $243,000 into the Social Security system.
Using his age at the time of the calculation, which was 57, Klein determined that he would have to pay between $544,000 and $656,000 to buy a single-premium deferred-income annuity that would pay the same as his Social Security payments at ages 62, 66 years and two months (his full retirement age), or 70. He is projected to receive between $1,870 and $3,385 a month from Social Security, depending on his age when he starts taking benefits.
By the time he retires, Klein estimates, he and his employer will have paid $314,000 to $381,000 into Social Security, depending on when he retires, far less than the cost of a deferred income annuity that would match the Social Security benefits.
Part of the reason Social Security is such a good deal, Klein explains, is the fact that the benefits go up 8 percent a year for each year the recipient delays receiving benefits after full retirement age until age 70.
To keep the calculations simple, Klein says he did not include his wife’s spousal Social Security benefits. But in fact, she will be entitled to half of the amount he is receiving when she reaches her full retirement age and she will receive either his full benefit amount or hers, whichever is higher, after he dies.
Even without considering his wife’s Social Security spousal benefits, the cost of a deferred-income annuity that pays lifetime benefits is substantially higher than the amount paid into Social Security, Klein notes.