How to hike your guaranteed lifetime retirement income

One of the most difficult retirement planning challenges is dealing with the uncertainty of how long you might live. You just don't know whether you'll make it to age 75, 85 or 95. That's why it's smart to develop sources of retirement incomethat guarantee to pay you no matter how long you live, such as Social Security, a pension or an annuity from an insurance company.

The trouble is, many people haven't earned a significant pension from their employer, and many retirees don't buy annuities from insurance companies. That leaves you with just one option: maxing your Social Security benefits, which you can do by delaying the start of benefits. For each month you delay, your monthly retirement income rises, but that increase stops at age 70, after which you receive no additional credits for delaying your benefits.

Delaying the start of Social Security benefits will boost the expected lifetime payout from Social Security for most workers. But that's not the only advantage of a delay strategy. For married couples, it will also improve many widows' retirement security.

But what if you want to retire before age 70? If you have significant retirement savings, typically more than $100,000, you can still retire before age 70 and postpone the start of your Social Security benefit with a Social Security optimization strategy. This approach uses a portion of your retirement savings to withdraw amounts equal to the Social Security benefit you would have received while you're waiting.

A recent study (of which I was a co-author, along with Wade Pfau and Joe Tomlinson) from the Stanford Center on Longevity (SCL), in collaboration with the Society of Actuaries (SOA), provides examples of this strategy. One example analyzes a 65-year-old single female with $250,000 in savings. In this case, her annual Social Security income would be $16,895 per year starting at age 65, but it would increase to $23,903 if she waits to age 70. That's an increase in her annual income of $7,008.

If she still wants to retire at age 65, she would withdraw $16,895 each year from her savings, adjusted for inflation, to help pay her living expenses while she's delaying her Social Security benefit. In essence, the increase she created with her Social Security benefit by withdrawing from her savings is like buying a lifetime annuity from Social Security at a rate that's far better than what she would get from an insurance company.

The SCL/SOA study also estimated the boost in total retirement income that's possible with a delay strategy by projecting retirement incomes for more than 100 possible solutions.

In addition to the single female described above, it examined two different married couples. The results consistently showed that retirees would realize increases in their total annual retirement income, averaged over their life and including Social Security benefits, ranging from 2 percent to more than 13 percent. Increases ranging from 5 percent to 10 percent were typical for common retirement income strategies.

Two situations deserve special attention:

• Retirees who use a systematic withdrawal plan to generate a retirement paycheck and allocate substantial portions of their assets to fixed-income investments should consider a strategy to delay Social Security benefits. Granted, if you don't use savings to delay Social Security benefits and instead invest it to generate retirement income, you do stand a chance of producing more retirement income. But you'll need to earn high investment returns that are typically possible only by investing everything in stocks. This means taking on substantial investment risk. However, delaying Social Security benefits has no investment risks. Retirees who aren't comfortable with substantial stock investments will benefit from a delay strategy.
  
• Retirees using high-priced retail investments or retail annuity products should consider first devoting a portion of their assets to delay Social Security. The examples of increased retirement incomes above used low-cost, institutional pricing for comparing a delay strategy to both investing and annuity strategies. The improvement in projected outcomes for a delay strategy will increase even more when comparing them to costly retail investments and annuities.

A delay strategy has one downside: The savings you devote to it will no longer be liquid and accessible for emergencies. So, it's a good idea to set aside enough liquid savings to handle unexpected emergencies that might come your way.

What if you don't have enough savings to delay Social Security all the way until age 70? Then you have two options. You could use your savings to delay Social Security as long as possible, even if that's just a year or two. You'll still realize a valuable increase in your guaranteed lifetime retirement income. Or you could work part-time, just enough to equal the Social Security benefit you're postponing.

Many boomers approaching retirement will need all the financial help they can get, and a delay strategy just might provide a needed boost in their income.