Social Security, the TSP and your expiration date?

If you could find out, for sure, when you are going to die — would you do it? Knowing your precise expiration date could be comforting in some cases. And a crippling nightmare for others.

For financial purposes, it would help 401k holders decide whether to stick to conservative investments like the TSP’s G and F funds, or go with higher-risk, higher-option investments like the stock-indexed C, S and I funds. With much lower returns in most years, the Treasury and bond funds produce a smaller nest egg that is more subject to high inflation. Over a period of medium to high inflation, those retirees would lose purchasing power. Those investing the same dollar amount in the higher risk/reward stock funds, at least so far, have larger account balances to draw from.

It would also help people in deciding when to take Social Security. For somebody with a long retirement horizon ahead of them, deferring Social Security until age 70 could boost their benefit 68%. It would also mean no Social Security income until age 70.

Tough call. But one worth considering very carefully.

When they qualify for Social Security, many Americans apply as soon as they are eligible. Many need the income. They may have had a short working career, worked in a low-paying job or retired from a company that doesn’t offer a pension plan or retirement benefits. which by the way, is most nowadays. Unless they have a lot of savings and/or a six-figure 401k plan, they may need the monthly Social Security benefit immediately. Many don’t know that every year they delay applying for the Social Security benefit it goes up in value 6-to-8%. So taking it at age 70 would mean it was 68% higher than if they took it when first eligible.

A 68% increase is a lot!

Others know but don’t care. The worry about dying before they at least collect the equivalent of all the money they contributed to Social Security while working. They want to “break even” and not leave any money on the table if they die “too soon.” A response to a column last month made the argument, by a career employee of the Department of Energy, for taking the money as soon as possible. He wrote:

You asked, is Social Security Insurance, or investment?

Well, is an annuity or insurance an “investment”? They are usually sold as investments, usually by insurance salesmen!

And FICA has the word insurance in it. But it is different than most insurance, which pays if something BAD happens, like a fire, flood, car accident, vacation interruption, sickness, AFLAC, etc. So is this insurance, in case I keep on living?

Maybe it is. But most people consider it as more like a long term investment program, even though it is paid by a tax, and the payout is at the whims of Congress (the Supreme Court has already ruled on that). Congress could legally reduce or terminate all Social Security payments tomorrow.

Well, first they would have to be able to agree on which day of the week it is, so reductions are not likely anytime soon.

If it were truly insurance — that is, a traditional annuity managed by an insurance company — it would run afoul of the State Insurance Commission, because it is not even close to being solvent in the long term, and also possibly for mishandling the investing of the contributions.

By the way, back in high school we had a guy from Social Security come and talk about our “contributions.” He did not mention the word tax. But that and the solvency is a very different topic.

Like you said, the question of when to take it depends on circumstances. If you can afford to retire at 62, then you will do so. You can delay getting your “insurance” if you want to. If you can continue to work until 66, 67 or 68, I suggest you do so. At 66 (or your minimum full retirement age) you can start collecting and still keep working without any loss of benefits (85% of the Social Security benefits will be taxed. Are any other insurance payments taxed?).

The question is, do I start collecting my insurance now, or do I wait and collect a slightly bigger payment later? The previous respondents have provided the math, which is pretty close to what I got (slight variation in how you set up the problem, how to include COLAs, how to include additional working years, give you slight variations in the results). But whether it is 125 or 130 months is not really important.

Do you need the payment now? Like paying for extended family education, illness, etc. (a probability of 100%)? Compare that to how you might need a few extra dollars at age 90. Or maybe you think you could get a better return investing it yourself than whatever the actual return on investment would be by delaying collecting your insurance. For example, you could invest in 5-to-10 year treasury obligations.

Yes, it is officially insurance, but it was sold as a “retirement savings plan.” And it sure looks, walks and quacks like an investment.

But benefits expert Tammy Flanagan sees it very differently. Her response:

He is missing my point! I am not worried about dying early… I’m worried about running out of money if I live a long time! If I die and don’t break even… who cares? But… If I live to 90 or even 100, I will appreciate that larger monthly benefit that will last as long as I do!

A baby born today can be expected to live, on average, 78.6 years, according to numbers from the Centers for Disease Control and Prevention. A 65-year-old has a life expectancy of 19.5 years.

These CDC statistics are averages. That means many people don’t live that long, and many people live much longer. It’s not crazy to expect your time in retirement to last longer than your time in the workforce.

And the older you get, the longer you can expect to live, as you’ve escaped many of the risks.

I never understood when someone would care if they “break even” on their Social Security. It’s INSURANCE!!

So what about you? Do the math and be very, very careful!

Nearly Useless Factoid

By Alazar Moges

Greg Packer, known for having a fixation for being the first person to take part in public events, is recognized as the first person to buy an iPhone. In 2007, he camped out for several days in front of the Apple Store on 5th Avenue in New York City. His other feats include being the first to sign the book of condolences over Princess Diana’s death and the first in line to greet President George W. Bush after his first inauguration.

Source: Apple Gazette

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THRIFT SAVINGS PLAN TICKER

Sep 17, 2021 Close Change YTD*
L Income 23.2077 -0.0415 4.43%
L 2025 12.0240 -0.0418 8.33%
L 2030 42.5522 -0.1952 10.54%
L 2035 12.7953 -0.0643 11.50%
L 2040 48.4773 -0.2641 12.46%
L 2045 13.2947 -0.0772 13.28%
L 2050 29.1552 -0.1795 14.12%
L 2055 14.3671 -0.1053 17.18%
L 2060 14.3671 -0.1053 17.18%
L 2065 14.3671 -0.1054 17.18%
G Fund 16.6644 0.0006 0.88%
F Fund 21.0666 -0.0298 -0.55%
C Fund 66.6676 -0.6128 21.56%
S Fund 85.0861 -0.0794 16.31%
I Fund 39.4469 -0.3006 11.70%
Closing price updated at approx 6pm ET each business day. More at tsp.gov
* YTD data is updated on the last day of the month.