BUSI 352 Week 7 Case Study 2 Example

Linda Carter at 60: Timing Social Security and Turning Savings Into Income

Client Facts and Goals

Linda Carter is 60, widowed two years ago, and works as a school district administrator earning $68,000. She is in good health, and her mother lived to 94. She wants to retire at 63, stay in her paid-off home and leave something to her two adult children, though her own security comes first.

Two decisions drive the plan: when and how to claim Social Security, and how to turn her savings into reliable income.

Social Security: Claim One Benefit Early, the Other Late

Linda is eligible for two benefits: a survivor benefit based on her late husband's record and a retirement benefit on her own record. She cannot receive both in full at once, but she can claim one and switch to the other later. Survivor benefits can begin as early as 60 at a reduced rate, rising to the full amount at her full retirement age of 67. Her own retirement benefit grows by 8 percent for each year she delays past 67, reaching 124 percent at 70.

Because she plans to work until 63, claiming anything before then would be reduced further by the earnings test. At 63, a reduced survivor benefit would pay roughly $2,000 a month. Her own benefit, left untouched until 70, would grow to roughly $2,670 a month, more than the full survivor benefit. The plan, then, is to claim the survivor benefit at 63 and switch to her own benefit at 70.

Delaying the larger benefit is supported by research. Shoven and Slavov (2014) found that waiting to claim Social Security pays off in expected value for many people, especially those with longer life expectancy, and that the advantage had grown as interest rates fell and life expectancy rose. Coile et al. (2002) found that many people claim as early as they can even when delay would raise the expected value of their benefits. Linda's family history of long life makes the larger benefit at 70 a form of longevity insurance she cannot buy as cheaply anywhere else.

Filling the Gap From 63 to 70

From 63 to 70, Linda's after-tax spending of $46,000 would be met partly by the survivor benefit of about $24,000 a year. The remaining $22,000, plus taxes on 403(b) withdrawals, means withdrawing roughly $26,000 a year, about 6.8 percent of the 403(b) at first. That rate is high for a lifetime, but it is temporary. At 70, her own benefit of about $32,000 a year would cover most of her spending, and withdrawals could fall to roughly $17,000 a year, a much safer rate on the remaining balance. Dalton et al. (2016) describe retirement planning as matching income sources to needs over time, and this plan front-loads withdrawals to buy a larger lifetime benefit.

To protect against a market decline in the early years, when withdrawals are largest, Linda should hold about three years of the gap, roughly $75,000, in cash and short-term bonds, and keep the rest in a balanced, diversified portfolio. Her $30,000 in cash savings can remain as an emergency reserve. The Roth IRA should be the last money spent, since it grows tax free and passes to heirs efficiently.

Health Care Before Medicare

One cost the spending estimate must include is health insurance between retirement at 63 and Medicare eligibility at 65. Linda's district may offer retiree coverage; if not, she will need a marketplace plan for two years, and her premium will depend partly on her reported income. Because 403(b) withdrawals count as income, drawing more from the Roth IRA in those two years could keep her income lower and her premium tax credit higher, a small exception to the rule of spending the Roth last. Dalton et al. (2016) treat health care as one of the largest and least predictable retirement expenses, so the plan should set aside an estimated $15,000 to $20,000 a year for premiums and out-of-pocket costs until Medicare begins, which raises the bridge-year withdrawals somewhat.

Should Linda Buy an Annuity?

Economic theory makes a strong case for annuities. Yaari (1965) showed that, under certain assumptions, a person uncertain about how long they will live would be better off converting savings into an annuity that pays for life. Yet few retirees annuitize. Brown et al. (2008) found that people's interest in annuities depended heavily on framing: when choices were presented in terms of consumption, annuities were strongly preferred, but when presented as investments, many people saw annuities as risky bets that might be lost if they died early.

For Linda, the larger Social Security benefit at 70 already works as an inflation-adjusted annuity. Rather than annuitizing heavily, she could consider using a modest portion of her 403(b), perhaps $75,000, at 70 to buy a single-premium immediate annuity if she wants more guaranteed income. Framed as buying a paycheck for life, not as a bet on longevity, the choice may be easier to evaluate.

Recommendations

• 1. Continue working until 63 and maximize 403(b) contributions, including catch-up contributions, to strengthen the bridge years.
• 2. At 63, claim the reduced survivor benefit and begin 403(b) withdrawals of about $26,000 a year.
• 3. Hold about $75,000 in cash and short-term bonds for the bridge years, in addition to her emergency savings.
• 4. At 70, switch to her own retirement benefit, reduce withdrawals, and consider a modest immediate annuity.
• 5. Budget for health insurance from 63 to 65, using Roth withdrawals in those years if that lowers her marketplace premium.
• 6. Otherwise spend the Roth IRA last, and review her estate documents and beneficiary designations.

A Biblical Perspective

Proverbs teaches that the wise store up while the foolish consume everything they have (English Standard Version Bible, 2001/2016, Proverbs 21:20). Linda has saved faithfully. A careful plan honors that saving by making it last, and it gives her freedom to be generous with her children and her church without fear of outliving her resources.

References

Brown, J. R., Kling, J. R., Mullainathan, S., & Wrobel, M. V. (2008). Why don't people insure late-life consumption? A framing explanation of the under-annuitization puzzle. American Economic Review, 98(2), 304-309. https://doi.org/10.1257/aer.98.2.304

Coile, C., Diamond, P., Gruber, J., & Jousten, A. (2002). Delays in claiming social security benefits. Journal of Public Economics, 84(3), 357-385. https://doi.org/10.1016/S0047-2727(01)00129-3

Dalton, M. A., Dalton, J. F., Gillice, J. M., & Langdon, T. P. (2016). Fundamentals of financial planning (5th ed.). Money Education.

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Shoven, J. B., & Slavov, S. N. (2014). Does it pay to delay social security? Journal of Pension Economics and Finance, 13(2), 121-144. https://doi.org/10.1017/S1474747213000309

Yaari, M. E. (1965). Uncertain lifetime, life insurance, and the theory of the consumer. The Review of Economic Studies, 32(2), 137-150. https://doi.org/10.2307/2296058