It Pays More Than Ever To Delay

Single people can receive tens of thousands more from Social Security over many years of retirement and couples can receive nearly $125,000 more by waiting until their late 60s to sign up.

The most common age for starting up Social Security is 62, when individuals first become eligible, even though monthly benefit checks would rise sharply if they’d wait. But it’s becoming increasingly worthwhile financially to hold out, according to economist Sita Nataraj Slavov of the American Enterprise Institute, who presented her research findings at the Retirement Research Conference in Washington last month.

 

 

 

 

 

 

 

 

This contradicts the conventional wisdom that no matter when people file, they’re going to essentially receive the same total amount over their entire retirement. The trade-off has always been between filing early and receiving a smaller check for a longer period of time, or filing later and receiving a bigger check for fewer years. Financially, it’s a wash.

But an economic fluke has changed all that: historically low interest rates. Slavov and co-author John Shoven, a Stanford University economist, have determined that, increasingly, there’s a payoff to holding out in this unusual rate environment. (More later on how that works.)

“There’s real money at stake here. This is not a trivial amount for most people,” Slavov said in a telephone interview. “What we’re trying to communicate is, it’d be good to think more about what you’re giving up when you claim early.”

At Squared Away’s request, Slavov calculated the present values for retirees who file for Social Security at the age at which they would maximize their benefits – she did so for the average single man, single woman, and two-earner couple. The payoff is largest for married couples who delay filing for benefits: …Learn More

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401(k) Tax Break May Be Weak Incentive

The typical American household approaching retirement age had just $42,000 saved in its 401(k) in 2010. This raises the question: Does the federal tax incentive designed to spur savings even work?

In what one retirement expert called “landmark” research, a new study has found that employers’ automatic enrollment and other employee mandates are far more effective ways to increase retirement savings than the federal tax exemption granted for retirement-fund contributions.

Harvard University Professors Raj Chetty and John Friedman, together with Soren Leth-Petersen and Torben Nielsen at the University of Copenhagen, tested the impact of both types of incentives on an enormous sample of 4.3 million people in Denmark. Chetty said the findings also hold implications for the United States.

They found that every $1 increase mandated for retirement savings – in this case, by a temporary Danish policy that required workers to contribute 1 percent of their earnings to government pension savings accounts – spurred 86 cents in additional savings by individuals. In contrast, the Danish government’s tax subsidy, which is very much like our own 401(k) tax break, spurred only 20 cents more in savings.

“This is a landmark study,” Dartmouth College professor Jonathan Skinner said about the paper, presented during the Retirement Research Consortium’s conference in Washington in early August. “I can’t emphasize enough how important this study is in terms of how retirement policies work.” …Learn More

Less Smoking Trumps More Obesity

Smoking cigarette

Since the 1950s and 1960s, the number of cigarettes smoked in the United States has plummeted by one-half but the number of obese Americans has tripled.

So which megatrend has a greater impact on U.S. health and life expectancy? Remarkably, the winner is the positive effect of the decline in smoking. And the additional longevity, as fewer Americans light up, will continue to play out at least through 2040, according to new research.

“The advantages of smoking reductions are expected to outweigh the disadvantages of increases in obesity for both sexes,” according to findings by University of Pennsylvania sociologist Samuel Preston and his colleagues at UPenn’s Population Studies Center and at Emory University’s Department of Global Health.

The declining popularity of smoking has driven down deaths due to lung cancer to 18 percent of all U.S. deaths. But currently obesity is nearly running neck and neck, causing 16 percent of all deaths.

“We have a horse race going on,” said Christopher Ruhm of the University of Virginia’s Batten School of Leadership and Public Policy, who commented on Preston’s paper at the Retirement Research Consortium’s conference in Washington earlier this month. “The winner of the horse race is that the smoking effect is going to dominate.” (The Center for Retirement Research, which sponsors this blog, is a consortium member.)

Estimates of longevity, in this particular case, should be viewed with caution. The mortality impact isn’t easy to calculate, Ruhm and Preston said, because many conflicting things are going on at the same time. For example, although obesity is rising, cholesterol-lowering statins and blood pressure medications are reducing the risk that any individual will die from obesity. …Learn More

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In Session: Retirement Conference

Squared Away is not on vacation: I’m attending the annual Retirement Research Consortium’s conference in Washington D.C.

Follow my tweets @SquaredAwayBC to learn about some of the research findings being presented at the conference. I’ll also be writing blog posts about individual research papers in coming weeks.

Topics being discussed today at the conference include the impact of a decline in smoking on U.S. life expectancy, the personality traits that are associated with being prepared for retirement, and how Social Security policies affect your decisions about when to retire.

To receive email alerts about the week’s blog posts, click here.

There’s also Twitter @SquaredAwayBC, or “Like” us on Facebook!Learn More

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Little Thought Put Into Retirement Date

When to make the break and apply for Social Security benefits is one of the biggest financial decisions an individual will make.  But new research suggests that people may put more thought into buying a car or a mattress.

The goal of a new research study was to determine how people make this critical decision and how to possibly influence them to delay claiming – delaying is often the best thing financially for retirees, since doing so increases their monthly benefits.

But what’s striking is a basic finding of the research.  Individual decisions about the timing of an application to start up Social Security benefits depend simply on the order in which the person thinks about the benefits of his actions: those who first think about the advantages of claiming early – before they consider the advantages of claiming at a later age – prefer to claim early, and vice versa.  That’s it!

This finding, which comes out of the Columbia Business School’s Center for Decision Sciences, complements one survey that found that close to half of all people contemplate their date of retirement for no more than 12 months. …Learn More

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Discovery: Dopamine as ‘Risk Avoider’

Famously known as the brain’s “feel-good chemical,” dopamine is no longer associated only with thrilling activities: it can have the opposite effect.

Past research has linked dopamine to risk-taking – it can explain the thrill of sky-diving or venturing out on the Grand Canyon’s glass-bottom walkway.  But new research on the brain has uncovered dopamine’s role in the tendency of people to avoid risks.  The new findings, by Harvard Medical School researcher Michael Treadway and colleagues at Vanderbilt University, have implications for all types of human behavior – including whether we’re willing to take financial risks.

Different people exhibit “different appetites for a certain amount of risk and how they experience risk and how gun shy they are,” Treadway said.  This may depend on where the effects of dopamine take place in the brain.

That’s a dopamine molecule.  We typically talk about financial behavior and psychology or use terms like motivation and decision making.  The truth may be hard to grasp, but it all comes down to gooey chemical interactions in our gray matter. … Learn More

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How Can Debt Enhance Self-Esteem?

The media went crazy last month over research determining that debt – whether college loans or credit cards – is a major source of self-esteem for young adults.

Judging by the tone of these articles, the reporters were so flabbergasted that they didn’t think to ask the logical follow-up question: Why? Credit cards aren’t inherently bad, though they can get people who abuse them in trouble. But equating self-esteem with debt seems to turn the notion of financial judgment on its head.

So Squared Away consulted therapist Dave Jetson and financial planner Rick Kahler, both of Rapids City, South Dakota. They often work together with clients on their financial issues but offered different explanations for this puzzling phenomenon.

Because debt is increasingly required to get a college education, Kahler said it may benefit from the glow of what an education represents. Debt has become a mark of being “smart enough to get through college.”

Jetson sees a dramatic cultural shift that is influencing today’s young adults. This shift coincides with shrinking economic opportunity for many college graduates. …
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