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How to Beat Bonds Using Social Security

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Knowing when to take Social Security can be a real chore.  We frequently work with clients to determine the optimal time to take the benefits.  There are different ways to calculate the benefits of waiting, and this recent WSJournal article equates the return to a bond investment, with a surprisingly high payoff.

Consider an unmarried man in average health, age 62—the youngest age for starting retirement benefits. His payoff for waiting until age 67 to collect is the equivalent of buying a long-term bond that pays 3.2% a year. For a woman, all else held equal, it’s a 4% yearly return, according to Mr. Shoven and his research partner, Sita Slavov at Occidental College.

Here’s the whopper: For married couples, if the higher-earning spouse delays payments from age 62 to 70, but at age 66 begins collecting spousal benefits from the lower-earner’s plan (as Social Security allows), the return is like owning a 7% bond.

Not just any bond, either. The fictional alternative would have to be government-guaranteed and provide periodic inflation adjustments. And the income would have to be tax-free for most recipients.

The closest real-world investments are Treasury inflation-protected securities, or TIPS. They’re government-backed and inflation-adjusted, but they’re subject to federal (but not state and local) tax. Ten-year TIPS on Thursday paid minus-0.21%. That’s not a misprint; bond rates are so low that investors are paying to own TIPS just to get the inflation adjustment.

Put differently, a 7% annual return for delaying Social Security payments is for many investors better than a bank certificate of deposit that pays more than 10%, considering the inflation adjustment and tax advantages.

But beware- making any long term plans based on politics is bound to disappoint.

Some retirees find advice on when to start Social Security benefits confusing. That’s because even a ballpark calculation must consider not only factors like gender, marital status, income and health, but also long-term changes to life expectancies and short-term changes to interest rates.

For now, the deal remains sweet. The plan’s trustees say there is enough cash to pay full benefits through 2036 and three-quarters of benefits thereafter, and Mr. Goss says such deadlines historically have served as a call to action for Congress.

Members of both parties are considering legislation to rein in costs. “We clearly have to make changes to things like the retirement age to keep the program affordable,” says Sen. Tom Coburn (R., Okla.), the ranking member of the Finance Subcommittee on Social Security, Pensions and Family Policy.

If you’re making plans based on maximizing Social Security, be sure you have a fallback or contingency scenario in case benefits change during your waiting period.

The Best Annuities- Barrons Top 25 Picks

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Asset Allocation on Wikibook
Asset Allocation Image via Wikipedia
Annuities are making news again and last week Barron’s decided to outline the reasoning consumers use to justify a purchase.  It’s all about safety for those who have experienced shocks in the market.  The related article also gives a list of the five best annuities in each of five categories.  In the end you’ll get a solid list of what Barron’s considers to be the best products on the market according to fees, past performance and company stability.  Read the article and see the list here– be sure to click the image of the list of quality annuities.
 
What is the primary characteristic of this list?   You’ll notice the first priority is the credit rating.  It’s imperative to understand that annuities are insurance, and are designed for the safe and low risk allocation of your portfolio.  The credit quality of the issuing company is of paramount importance then.  You will definitely find higher payouts and rates than on this list but as you dig in, you will nearly always find lower quality credits. 
 
Have you honestly analyzed your portfolio and your retirement income needs?  Most investors are accustomed to an asset allocation that is appropriate for accumulation.  But for investors approaching retirement, this often results in an inappropriately large allocation to stocks and even riskier classes of bonds.  Aligning your portfolio with your current and future needs is the first step in finding the right retirement income allocation- look for a future post on a useful exercise to help in this step.
 
Now, for the next comparison, please open this page– it's our secondary market annuity available inventory.  Notice the yields and the names of the insurers who make these payments.  These carriers have the same incredibly high credit ratings as Barron's top picks, but your yield is much better.  Why? Simply because the discounted purchase price available to you translates into a higher yield.  That's why we thump the table on Secondary Market Annuities- they are an incredible value, of high credit quality, and available most likely for only a limited time to individual investors. We'd be happy to help you do due diligence on the credit or specific contract terms of any specific secondary annuity you are interested in.  
 
With so many products on the market, there are likely many annuities that are comparable to the Barron's list.  As long as you understand how to compare different products you should have no problem finding one with the best mix of benefits for your situation.  Since most of you have read The Annuity Report, you know what it takes to do that kind of analysis and find an advisor that puts your needs first
 
We stand ready to assist and hope you will consider this opportunity in the secondary market annuity marketplace as well in your search for high yield safe investments.