Dear Liz: I’m 64, single, and was diagnosed with Type 2 diabetes. I still work full time but due to my health, it’s getting harder to do. I have a 401(k) from this job. I’m just wondering how smart would it be, all things considered, to retire now and collect Social Security since the chances of my living another two to four years don’t seem high. What are your thoughts?
Answer: A large body of research shows most people are better off delaying Social Security. Your situation may be one of the exceptions, or it may not be.
A man age 65 in the U.S. can expect to live, on average, to 84, according to the Social Security Administration. A woman age 65 can expect to live, on average, to nearly 87. That’s beyond the typical “break even” point, where the benefits of larger Social Security checks for life outweigh the cost of missed checks from not claiming earlier.
But most people shouldn’t base their claiming strategy on break-even points alone. Dying too soon and not being able to get the maximum payout from Social Security is certainly a risk. But a much bigger risk is longevity. The longer you live, the higher the odds of running short of money and having to get by on Social Security alone.
Those risks are greater than many people think. A 65-year-old man has a 20% chance of living to age 90, while a 65-year-old woman has a 32% chance, according to the Society of Actuaries.
If the man and woman are married, there's a 45% chance that one will live to age 90. That’s why it’s so important for the higher earner in a marriage to put off claiming as long as possible, since doing so will generate a bigger check for the survivor to live on. (Single people also are exhorted to delay claiming, since they will be living on just one check, rather than two.)
People with more education and higher incomes tend to live longer than average, while those in poor health obviously can have shorter life expectancies. A terminal diagnosis certainly changes the math. But you didn’t say why you expect to live only two to four more years. Various studies have estimated that Type 2 diabetes could shave five to 10 years off the typical life expectancy, which would still have you living well into your 70s. If you went through your savings as if you were going to live four years but wound up living 14, that last decade could be pretty uncomfortable.
None of this means you can’t retire now, but like everyone else, you should balance the desire to make the most of the time you have left with the risk that you may live longer than you think. A fee-only financial planner could help you think through the options and run various financial scenarios so you can see how your decisions could play out over time.
Student loan forgiveness fail
Dear Liz: You recently answered a question from someone who had defaulted on federal student loans. You mentioned ways to get out of default and qualify for income-driven repayment plans that could reduce her monthly payments. Couldn’t she also qualify for student loan forgiveness?
Answer: There are programs that are supposed to allow federal student loan balances to be forgiven after 10 years of payments for people in public service jobs and after 20 or 25 years for other borrowers. It’s questionable how much anyone should count on getting this relief, however.
Last year was the first time borrowers qualified for forgiveness under the 10-year public service program, which was enacted under President George W. Bush in 2007. The Department of Education has denied the vast majority of applicants their expected relief. Nearly 40,000 people had applied by Dec. 31 and fewer than 300 people have been approved, according to the Washington Post.
Critics say the U.S. Department of Education has set much more rigid standards for approval than anything Congress envisioned when creating the program. Many applicants also relied on erroneous advice given by the private companies that service federal student loans.
It’s possible that lawsuits, or Congress, will force the Education Department to forgive more of the debt. But if this is what can happen to people who have given a decade of their lives to public service, one has to wonder how much relief other borrowers can expect to get.