Professor Richard Thaler offers up some very practical advice for future social security recipients:

There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits.

Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70. The claiming formula is designed to make the economic value of the stream of benefits the same, regardless of when you start. The longer you wait, the greater your monthly benefits when you start getting checks, because you will not receive them for as long a period. If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

With these rules, waiting is the cheapest way to buy more annuity coverage. However, few take advantage of this opportunity. Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible, the government says. Less than 5 percent of participants delay past age 66. This is unfortunate. If you are in good health and you can afford to wait, my advice is that you should wait as long as possible. The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living “too long.”

Straightforward, intelligent observation . . .


Getting the Most Out of Social Security
NYT, July 16, 2011

Category: Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

45 Responses to “Thaler: How to Convert Your Social Security Payments into an Inflation-Adjusted Annuity”

  1. Greg0658 says:

    is my cell tapped .. just had this conversation at the bar down the street .. (or is it the wifi games?)

    personally my goal post was moved down field … request and allow the pension at 55yo & take a wack at the knees of 52% (48% left) begin collecting and put back into the economy somehow someway .. a break even point for the pension system is I live to 84yo .. if I live past 84yo the pension loses .. I die before 62yo (wack of 12%) or 65yo (wack 0%) someone wins but not me (as it stands today 7/17/11)

    full boat pension I can see some european vacations .. short boat pension continental USA sees the benefit … what I do with time & fill in the gaps (dont know) but I survive to pay another month of utility bills and subsistance food (& beer)

    I think this goal post moving is counter productive .. faith lost in savings & plans …. beyond that I worked for that .. let me spend it back into the system …. now from a master planner pov .. it needs to pump the USA economy not the Euro .. and from a corpocracy pov don’t let this guy design a competing plan .. from WS pov (we need to suck his blood & then call in the vultures)

  2. Greg0658 says:

    more correct .. re-”allow the pension at 55yo”

  3. b_thunder says:

    There is a problems with delaying soc. security even for those who are convinced they will live long past the age of 70, even though noone knows when their “number is called”

    The problem is that as we’ve seen recently, in the 8 years you wait the world can be put on it’s head. By the time you start collecting the benefits may (and probably will) be so diluted that it may make sense to claim the benefits early (while the US dollar is still worth half of what it used to be) and invest the entire amount in something that will at least keep up with inflation (not to be confused with official CPI used to calculate COLA)

  4. b_thunder says:

    P.S. To ask people to postpone benefits is help the Government perpetuate their long term economy-destroying ways, to perpetuate the Ponzi, to help them postpone yet again implementation of real reforms.

  5. Jan Rogozinski says:

    There’s another point against waiting. The Republicans are deer mined not to return their money to those that have paid in.

    For expel, they say, well, there’ll be no changes for those over 55. Since they never have had to work for a living, the Rethugs are not aware that some poor folk, like me, started working when they were 14 or 15 and thus have paid social security tax by age 55 for forty years. 4O YEARS! To cut the benefits, raise the age limit, or mess around with the COLA (which already cheats seniors) for anyone over 15 in 2011 is pure theft

    The Repubs are willing to steal from taxpayers because they hate social security Adan the Americans that receive it. So if you are 62, take it now. God know what will happen when Michelle Bachman becomes President. But we know for sure that whatever happens will be a disaster for for anyone that works for a living.

  6. algernon says:

    To delay is an act of faith. Those last into the Ponzi scheme are always the ones most hurt.

    It is atleast as reasonable to argue that you should get what you can out of the system while the illusion of solvency still obtains.

  7. TerryC says:

    Yeah, he’s a genius. You know how many men die between 62 and 70? I see guys all the time in the obits in my town who are 45-60, let alone 70. And that’s assuming most people can wait for the money until 70. What the feds would really like is if we all just work hard until we die, like a plow mule, with no retirement at all. It’s always easy to get another stupid mule to pull the plow, and the dead mule out of the field. I really think this guy is on to something!

  8. USSofA says:

    The above line of thinking is probably good if you plan to begin taking social security once you retire and it will be your only income in retirement. What if you have substantial other investments? What if you are means tested out of some of your social security benefits? Means testing in medicare has already started and is increasing dramatically every year. Think about getting while the getting is good.

  9. GregP says:

    If we ignore political risk and assume the situation now is the same as in 1975, Thaler’s advice is fine.

    However, the political risks are asymmetric, and favor collecting earlier. E.g.:

    1) The inflation adjustment is subject to future manipulation.
    2) As years pass, means testing is more likely to be implemented.
    3) Marginal income tax rates may be higher 8 years later.

  10. USSofA says:

    Medicare means testing
    See chart on page 9. for rate of growth

  11. boy, golly~

    the NYT firing on all Cylinders..

    Death and Budgets – New York Times starts hinting at euthanasia as solution to debt crisis.
    This fiscal crisis is about many things, but one of them is our inability to face death — our willingness to spend our nation into bankruptcy to extend life for a few more sickly months.

    Webmaster’s Commentary:
    The NY Times has stopped further commenting or I would inform Mr. Brooks that medical care for the people is not the cause of this fiscal crisis, but the selling of this nation into the control of a private central bank issuing all public currency at interest, a system which by design produces more debt than capital. The fiscal crisis is the end result of nearly 100 years of living under the very same system of finance this nation fought a revolution to be free of.

    I would remind Mr, Brooks that the cleaning up of Wall Street’s Mortgage Backed Securities Fraud has cost the nation an estimated $27 trillion (by Dylan Ratigan’s figures) which far exceeds the social security and medical costs. I would also remind Mr, Brooks that the money for Social Security and medicare was already paid TO the government via payroll deductions, but is unavailable now only because the government then mis-spent the funds elsewhere, as can be seen by reading the transcript from the 1998 Senate Budget Committee session, specifically the comments made by Senatyor Hollings.

    HOLLINGS: “Well, the truth is…ah, shoot, well, we all know there’s Washington’s math problem. Alan Sloan in this past week’s Newsweek says he spends 150%. What we’ve been doing, Mr. Chairman, in all reality, is taken a hundred billion out of the Social Security Trust Fund, transferring it over to the spending column, and spending it. Our friends to the left here are getting their tax cuts, we getting our spending increases, and hollering surplus, surplus, and balanced budget, and balanced budget plans when we continue to spend a hundred billion more than we take in.”

    The US Government took the money of the American people on the pretense of providing care for them in later years, then spent that money on wars of conquest, Wall Street Bailouts…

    The US Government took the money of the American people on the pretense of providing care for them in later years, then spent that money on wars of conquest, Wall Street Bailouts…

  12. deanscamaro says:

    Most of the commenters don’t seem to agree with the professor, nor do I. I guess his assumption is that most people have a lot of other income to depend on. I don’t buy into that. At one time we might have had that option too, but a 40% hit to investments in 2001+ made the social security program necessary for us. Our investment returns lately follow the same path. I don’t trust the screaming, brain-dead politicians these days to leave the income we depend on alone, either. Our path to Armageddon seems to be a missile these days.

  13. RW says:

    Some folks are just plain worn out and can’t work any more which is why raising the starting age for SS is the wrong remedy and frankly a rather cruel one. Means testing isn’t much better IMO since it begins to move SS from the category of benefit program, something you pay into, into something that looks like more like welfare.

    Providing incentives to wait for those who are willing and/or able to do so is by far the better course but those incentives need to be strengthened and promoted more strongly IMO.

    For example it is already true that those have other sources of income and start SS early will probably receive less than expected because their SS payments will likely be taxable, something that is far less likely later if they wait. A lot of folks seem unaware of that.

    NB: As always a person’s actual tax rate, their bracket, is irrelevant: what matters is marginal rate; what someone actually winds up paying. I don’t know anyone who has paid their bracket %; certainly I have not even come close in many years and it seems the delta has grown larger virtually every year. And of course there are many corporations who pay no tax at all even while crying the blues about how high corporate tax rates create disincentives for them (my favorites are the corps who pay a negative marginal tax rate because they are also receiving subsidies of some kind or another).

  14. calmobserver says:

    As all to often the good professor’s advice would be great in an ideal, academic universe, but unfortunately very stupid in the real world. I’m relieved that nearly all commenters here recognized that. Good luck to all those who think that leaving money “in the system” will make them richer.

  15. ToNYC says:

    If you wait until 70, will you get thrown in Heaven too?
    Oops! I just threw up my confession.
    Tomorrow is optional; Time is no longer nor ever was on your side.
    Your currency is melting away today.

  16. derekce says:

    Lots of fear in the comments advising people to take the money and run but it almost always is smarter to wait. The odds are much greater you’ll outlive your benefits by starting early than die before your break-even point by waiting.Also, working longer increases your 35 year work record when your lower paying years drop off. In a low return environment for savers the huge increases in your payout for waiting a few years is a home run. If your spouse can draw also,waiting can make the survivor benefits higher with some strategies, but the rules are complex.

  17. bonzo says:

    If you analyze the situation, inflation adjusted annuities are how old people should invest 100% of their wealth, assuming they don’t care about heirs. A win-win situation for everyone except potential heirs. Insurance company makes a profit, annuitant can safely spend more than they would otherwise, society benefits from an even level of saving/spending, as opposed to pro-cyclical saving/spending. Also, the fact that heirs are cut out is probably also a big win for society. There’s something sick about a situation in which children stand to benefit from an early death of their parents, and stand to lose from a long life. Also, if most people bought annuities and so had nothing in their estate, we might get some sane discussion of estate/inheritance/death taxes, which are vitally important to prevent the emergence of an hereditary aristocracy of wealth.

    Problem is, can you trust a private insurance company to be around in 40 years? Unlike the lower-class types commenting above, it is pretty obvious to me that the US government will be around in 40 years and that it will meet all its commitments. The CPI might be adjusted downwards slightly, but the fairly generous (compared to private insurance companies) rate-of-return calculations used by the Social Security administration and the low overhead compared to private annuities still makes Social Security the best inflation-adjusted annuity around.

  18. GeorgeBurnsWasRight says:

    The following comments concern people who are deciding at what age they want to take Social Security, not for workers with many years left before they are eligible to make these decisions.

    Another aspect to evaluate is the risk from having all of your retirement income dependent upon fewer types of income. As we have seen, private defined-benefit plans can be reduced or even voided by plan bankruptcies. Defined contribution plans, while probably not dependent upon the solvency of the company you worked for, still have a risk of loss of money depending upon where the money actually is. (If it’s in the stock or bond markets, the risk is obvious. But even if you buy an annuity, receiving payments over the life of the annuity is dependent upon the solvency of the company which you bought the annuity from.)

    Social Security also has risks, but they are different risks from the risks in the above instruments.

  19. rktbrkr says:

    SS makes it sound like you’re getting something extra by waiting longer, by actuarial tables you’re getting the same total and the actuarial tables don’t take various political risks into account. If you don’t think the risks are real you’re living in a fools paradise.

    PS SS eliminated the pay back option recently. Just pfft gone, they can do that and they can do lots of other things to screw you administratively, stay tuned if you don’t think these things will happen.

    Remember when SS was to be tax free, now it’s taxed 85%…going to 100% taxability is a slam dunk.

  20. ilsm says:

    A (not so fictitious) friend looks at annuities only on the monthly check, he planned his retirement to maximize the monthly check. He worked longer at more stress and a lot more “dismay” than I think the extra was worth.

    I take a different view and discount the stream of the checks. Last I looked it would take more than 10 years of the extra monthly receipt to pay for getting no checks for the delay period.

    I have other income and will work past 62 if the work is fun. I won’t bet that I will live or be healthy to say I won at 76.

    However, if the monthly check is needed for subsistence then waiting makes good sense.

  21. rktbrkr says:

    COLA was ended a couple years ago and even if it comes back (doubtful) they’re going to fuck around with the inflation computation so much it really won’t matter.

    Do like the airline pilots do before their employers go BK and screw their pension plans “take the money and run”.

    I wonder what would happen if people could take a lump sum distro of the actuarial computation of their Soc Sec ? LOL. Take the money and run? The Soc Sec office would look like a bank run if that option was available! (Be great for the economy though!)

    Wonder what state and local workers would do if they could take a lump sum distro of their benefits?

    Courts have always favored companies reneging on promised/contactual benefits to their retirees, we’ll need a long run of Dem admins to reverse the makeup of the courts making those rulings. We should live so long…

  22. rktbrkr says:

    If you’re in a nursing home in diapers and the home is sucking in all your assets at a prodigious rate what does an extra $50/mo in Soc Sec mean? An extra diaper change every day?

  23. Orange14 says:

    The other thing to consider about early SS is whether you can defer dipping into IRA/401K until the manditory 69 1/2 birthday. This is my situation today and while I have the luxury of letting the IRA/401K money sit tight, I wonder whether taking the early SS isn’t the way to go, particularly if I can invest it with a reasonable rate of return.

  24. Orange14,

    see some of ..

    Read about, and Seriously, Think about what it means, on an ‘Annulized Return’, to provide Liquidity to Others’ ‘Dreams of ‘Immense Payoffs’/ sell Lottery Tickets..

    It’s Sick, actually, that ‘Hedge Funds’ are paid “2/20″ to ‘achieve + alpha’, when, Realistically, “One” can achieve, greater than, that, readily, ‘on their own’..

  25. Orange14 says:

    @Mark E Hoffer – thanks for the weblink. I already have enough annualized return to keep me happy even if SS were to completely evaporate (not that I want to see this happen; in fact the SS money would be only used for travel which I guess is a good thing). Graham/Dodd has done me well over the years in this regard and I haven’t needed to take any exotic approaches to finance on (other than making sure I’m reading the corporate balance sheet correctly).

  26. Winston Munn says:

    (If you wait from 62 to 66 to start, your payments go up by at least a third)

    Then again, there is always the “Breaking Bad” option for early retirement.

  27. PeterR says:

    BR I think you missed the boat here with your imprimatur for waiting, per the cogent posts above.

    Waiting requires full faith and credit in the Ponzi scheme.

    No thanks.

  28. lalaland says:

    I’m personally going to try to save enough to avoid SS alltogether and no, I’m not rich now by any stretch of the imagination.

  29. Orange14 says:

    @Winston Munn – I just looked at my statement from the most recent year. If I wait until I am 70, it goes up by 45% from what I would receive at 66. I guess this is where Thaler is coming from regarding waiting. Unfortunately, I think this pretty much only applies to us high income types who read BR’s blog. Average working people are just happy to get money at age 62.

  30. Mike in Nola says:

    I suspect one reason people do not wait longer to take Social Security is the need for Medicare. Unless you keep a job with benefits, you need health insurance in our great society or you are subject to losing your savings and/or house.

  31. rktbrkr says:

    Encouraging workers to keep working longer tends to keep the unemployment rate higher as the geezers hang on to their jobs and there are fewer vacancies for younger workers to fill.

    Private industry grouses about “dead wood”and harasses older workers now when they’re leaving in their early 60s – just wait till they start hanging on another 5 years and the employers get hit with more health related absenteeism to boot (not an occasional Monday/Friday thing). Tough to prove age discrimination – nothing in it for lawyers really.

  32. Orange14,

    you may care to wonder..

    w/such..”…to take any exotic approaches to finance on (other than making sure I’m reading the corporate balance sheet correctly)…”

    Two Things, at the min…

    1) “Covered Call Writing” is hardly ‘Exotic’..if One owns the Underlying, per Definition, then They, already, own the Right, which They are Selling..

    If, One can ‘get with’ the Idea–”One, in the Hand, is Worth, Two, in the Bush”–it should come Clear(-er)..
    2) this Caveat..”(other than making sure I’m reading the corporate balance sheet correctly)”

    You should toss in the Trashcan.

    It has little to do w/ You’re ‘ability’ to “read Balance Sheets”.

    Everything to do with “whether those ‘Balance Sheets’ are reflective of *Reality”

    There are, extant, too, many Instances that are, already, ‘on the Record’ that should give One ’cause to pause’-about such *Veracity–or, not.

  33. Julia Chestnut says:

    That would be a great plan — if I anticipated getting anything from Social Security at all. I admit to a firm belief that they will figure out how to screw me long before I reach 62.

    That doesn’t mean that I won’t be fighting them tooth and nail on screwing me, but I think it would be an act of staggering faith to figure SS into my retirement plans after the shenanigans of the past decade.

  34. SANETT says:

    Any chance the Germans would go for a deal where we all retire at 55 and they support us? Worked for Greece.

  35. The one point never mentioned in these discussions is the single point that convinced me that taking SS at age 62 is FAR better than waiting.

    The cash I have been collecting is earning money. Those who compare when it is best to start collecting SS payments never seem to consider the benefit of starting early and investing the cash.

    Earn 7% per year and waiting can never generate enough cash to make the wait viable.

    Earn 6% and you have little chance of living enough to come out ahead by waiting.

    Mark Wolfinger

  36. Andy T says:

    Is this guy NUTZ?

    Take the money in while it’s still there and available. The risk is they “change the rules” later on you get much less.

    “A Social Security in the Hand is worth than the Promise of Two in the Future.”

  37. AlexM says:

    Regardless of everyone’s individual circumstance, what is most apparent is that many of us are extremely distrustful of getting what is our due. What is missing from Thaler’s discussion is mortality rates; those who die before electing to take SS collect nothing, those who wait may collect little or nothing in today’s dollars.

    Sad commentary on today’s life. And who knew that Obama was going to turn into a Republican and cut SS and Medicare? Those who voted for him, would you vote again for him?

    And like the union members in Wisconsin who voted reliably voted Republican until they came after unions, those backing the Tea Party must think that they are immune and other people’s benefits will be cut, not theirs.

  38. SteveinMaine says:

    My father’s father dropped dead of a cerebral hemorrhage at 41. My father died at 53.

    Today, I am 45.

    I have absolutely no expectation of ever seeing my 67 year old SS retirement age.

  39. vader says:

    Before anyone gets excited about waiting and while there is a bonus to waiting, nevertheless it will take 8 or more years to make up the difference. While the benefit is greater, you will have received sums for several years the the benefit will have to cover before breakeven is reached.

    So if you wait 8 years to 70, you may be 78 before you break even.

    Using the graph at

    750 at 62, 1320 at 70. 750 x 72 months = 54000 marginal benefit increase is 570 a month. Divide 54000/570 = 95 months or about 8 years. That is without interest calculations. Figuring a 3% annual return this would be a nest egg of 59,085 at age seventy and 8.6 years before catch up happens.

    IMHO in uncertain times, it is best to get the money asap.

  40. Hey You says:

    I am going to start collecting at 62 and give it all to the democratic party. then if I truly need the money at a later time I feel very confident that the dems will keep the gravy train rolling and as a senior I will be riding at the front of the train.

  41. rktbrkr says:

    It’s starting already – IF the COLA is restored the inflation computation will be reduced, this is just the start

  42. rktbrkr says:

    You get the same amount of social security payments according to actuarial computations, they are just compressed into fewer months if you wait. However exposes to you more risks than taking the money up front.
    1) Continuation of COLA freeze (already happening)
    2)Undecount of inflation (if COLA resumed) already proposed
    3)Taxation of full 100% of SOC SEC (vs 85% currently, I’d say thats a slam dunk
    4)Higher marginal & effective income tax rates – close to a slam dunk
    5)Administrative changes & interpretations (all bound to be the “wrong way” for recipients)

    Take the money and run once you have it it’s unlikely they’ll be able to retrieve it!

  43. DeDude says:

    The way I usually try to explain it is that if your full retirement age is 65 and you at that age would get $2,000 each month, then your benefit taken at age 62 will be reduced by 5/9 of 1% per month retired early (36 month x 5/9 % = 20 %) – so you would get $1,600/month if you begin collection from age 62.

    So to get $ 2,000 per month for life from age 62 you can either:

    1) Use savings for 36 month (and social security for the rest of your life) at a cost of $ 2,000 x 36 months = $72,000 (or 24K/year for 3 years)


    2) Take $ 1,600 per month of social security from age 62 and purchase an annuity to cover the remaining $400/month. Currently for a 62 year old male that would cost about $80,000 up front at age 62.

    So even for men this suggests that there is a better deal in waiting (at the current cost of lifetime annuities). If you believe that government at any time could shun its promises and change things without warning or grandfather clauses (and private sector would not do such a thing), then maybe the 10% loss is worth it to you. Similarly if you believe you can skip the annuity part and invest the 80K at a much better return than a private sector annuity will guarantee, then that may be the way to go (take risk to get higher return).

    Note that by using private annuities as “equalizers” the issue of how long you live has been taken out (provided you live past age 65).

  44. DeDude says:

    Rktbrkr @5:21;

    I thought SS benfits were counted 50% as taxable income for low income and 80% as income for high income earners. What is this about “85% going to 100%” proposal or actual passed law?


    The rules are an increase of 8/12 of 1% per months you wait past normal retirement age. That comes to 8% per year.

    The statements tell you what happens if you continue working until age 70 – and that will give you a higher base than if you stop working and take benefits at normal retirement age. So they are not really comparing apples to apples on those statements.

  45. Indeed Prof. Thaler has identified a way to “convert” your Social Security payments. Like all conversion experiences, followers of his suggestion may get more than they bargained for.

    Dave Harrison