Understanding Retirement Options
Q: Does it make sense for a taxpayer to retire at age 62 but defer signing up for Social Security until turning age 65? Would I be better off continuing to work until I am 65? I am assuming that the taxpayer has contributed the maximum possible to Social Security over the years and would qualify for the highest possible monthly benefit. This question has vexed me for years and I have been unable to get a consistent and coherent answer from the Social Security Administration. -- H.G .
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A: The answer you are seeking is a resounding “no.”
According to our experts in the Social Security Administration, it makes absolutely no sense for a taxpayer who retires at age 62 to defer taking payments until age 65.
Let’s get specific here. According to the administration, a worker who had contributed the maximum into the program, retired at age 62 in 1990 but waited until age 65 to draw benefits, would be entitled to monthly payments of $975 beginning in 1993. However, if that same taxpayer had continued working until age 65 before signing up for Social Security, the monthly benefits in 1993 would total $1,088.
Why the difference of $113 per month? Because the taxpayer who stayed on the job continued making contributions into Social Security and benefits are based on a worker’s top 35 years of contributions into the system.
But, you say, this taxpayer has always contributed the maximum possible to the system. True, but the maximum contribution in 1990 is significantly higher in both actual dollars and as a percentage of total earnings than it was 35 years ago. So the taxpayer who remains on the job for those additional years replaces three years of lower contributions with three years of contributions at the highest possible rate. Because the worker’s total contributions into the system are greater, so are his monthly benefits at retirement.
Now, remember that if our 62-year-old taxpayer had decided to take Social Security payments immediately upon retirement, his benefits would have been reduced by 20% for the duration of his life.
In the above example, the 62-year-old worker would have received $780 per month (80% of the amount to which he is eligible at age 65) if he had elected to take payments immediately upon retirement. In the three years between 62 and 65, he would collect about $28,000.
If, instead, that worker waited until age 65 to collect $975 a month, it would take more than a dozen years to get more money from Social Security than he would have starting at 62 at the lower amount. Especially when considering the time value of money, the retiree whose life span ends near the nationwide average of 77.4 years for males is ahead by signing up at 62.
Might As Well Keep Life Insurance Policy
Q: When I was born in 1961, my parents purchased a life insurance policy for me that matures when I am age 55. The policy, which requires annual payments of $44, should be worth about $15,000 at maturity.
I wonder if this whole thing makes any financial sense. Couldn’t I just take the cash value of the policy now, about $1,400, and do better by investing it somewhere else? -- S.K .
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A: At this point in the policy’s life, our experts say, you are better off staying the course.
Here’s why: Let’s take the $1,400 value of the policy and increase that amount by $44 over each of the next 22 years. Now, let’s assume a 7% return on your investment. What will you have? About $8,350.
In order to reach the $15,000 you policy will be worth in 2016, you would need an annual rate of return on your investment of more than 10%. As you know, that’s not likely anytime in the near future.
The point, say our experts, is that you have already suffered through the worst years of your policy’s earnings, and dumping it now would only rob you of its best years of earnings.
In addition, contributing just $44 per year over the next 22 years isn’t likely to prove much of a financial hardship.
Just to show you the value of starting to save early, if you put just $44 per year for 55 years in an investment returning 10%, you would have $82,700 at the end.
If you set aside the same amount at 10% for just 25 years, your nest egg would be just $4,325. And to demonstrate the importance even tiny differences in interest rates can make to savings held over long periods, consider this: investing $44 per year for 55 years at 9% generates a total of $55,444, significantly less than the 10% investment yielded in the previous example. At a 7% return, putting away $44 per year for 55 years would generate a total of $25,340.
RTC Will Cooperate If You Want to Refinance
Q: I own a commercial building and would like to refinance the mortgage on it. The problem is I cannot find out which lender holds the mortgage. As best I can determine, the mortgage may be part of some holdings by the Resolution Trust Corp., the federal agency that administers failed thrifts. What should I do? -- N.E.L .
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A: To find out for sure whether your mortgage is part of the vast holdings of the Resolution Trust Corp., you can contact that agency at 1-800-2970, ext. 67470.
Be prepared to give the consumer counselor the name of the name of the savings and loan that originally made your loan, the loan number and the state in which the thrift was located. Given that information, the counselor should be able to tell you whether the agency has the loan and how you can handle a refinancing.
However, be quite clear about this: the Resolution Trust Corp. will not refinance your mortgage.
You must find another lender willing to give you a mortgage on the property. Once you have secured a loan source, the RTC says it will cooperate with your new lender to assure timely completion of the transaction.
