Retirement in These United States

My annual “Would you like to review your retirement account” message arrived from one of my retirement plans today. This is my cue to post a reflection or two on the state of retirement in these United States. The first thing anyone should know about retirement is that if you’re not dirt poor, you need to have a reliable, as unbiased as possible, financial advisor. For me, that means a person in the employ of my investment company who does not earn a penny in commission from servicing my account. He also happens to know a lot.

The second thing is to wonder why you should pay any attention to anything I have to say. Quite possibly you shouldn’t. But I do have more expertise than most folks. Some of you might recall that when I left grad school at UC-Berkeley, I entered the full-time employ of the B’nai B’rith Hillel Foundation (Berkeley). They hired me to teach biblical Hebrew part-time, and to fill out the rest of a full-time job, I became their accounting assistant. To do that, I enrolled in courses at a local community college so as to be at least one level better than flat-out ignorant.


The retirement program at Berkeley Hillel was a joke. And not a very funny one. To be fair, it was not unlike programs offered by many non-profits and small businesses. The folks that designed the program operated on the assumption that few people would actually spend their careers with Hillel or B’nai B’rith, so they used a plan where the employee paid nothing and pretty much received nothing in return. Among the exceptions to the notion that employees would not stay for their careers were the Foundation directors, many if not most of whom were rabbis, and that presented a number of problems to the administration because in the USA, clergy who wish to take advantage of tax breaks offered solely to clergy must be independent contractors. B’nai B’rith created a plan which took good care of these “independent contractors” and the rest of us got the sense we should look elsewhere for a career.


My solution to this problem was to create for our local staff our own retirement plan separate from that of the national organization. I received many communications from the national office telling me I couldn’t do this, but as it turned out I could and I did. As part of my job I needed to deal with the fact that our building was not owned by national Hillel, but rather by a local corporation. At the time that I started working on this, the corporation had become inactive. There was no one on its Board of Directors, and I suggested to our Director that this was dangerous because if it were discovered, we could be the subject of a hostile takeover. We repopulated the Board, and then the Board passed a resolution authorizing us to create our own retirement program. The plan we created did not conflict with the one run by the national office, it was supplemental to it. All of our contributions were voluntary to the maximum permitted by law.


As I mentioned, the national office plan was quite generous to the rabbis and a few other long-term employees. So generous that it was forced into bankruptcy in the 1990s and taken over by the Federal government agency which manages bankrupt retirement plans. I left Hillel in 1988 after 9 years of full-time employment. I was “100% vested” in the national retirement plan. To see how little that means, on my separation the pension plan offered me a “buyout.” They would give me $500 in return for releasing them from their obligation to pay me a pension. That’s what 9 years of full-time employment was worth to me. Please keep in mind that 9 years is about 25% of what most people will spend in their work lives. My response was, “Keep your $500, I’ll see what the pension is worth when I reach retirement age.” I actually didn’t expect to collect a dime once I learned of the bankruptcy, but as it turns out, I am receiving that pension. Since I turned 66, I’ve been getting $39/month from the federal agency that bails out bankrupt plans. Now, it’s practically nothing, and it’s subject to income tax even so, but I have already collected a lot more than $500!


In the meantime, the other retirement plan I helped design is doing very well. On separation from Hillel, I turned it into an IRA (Individual Retirement Account) and the principle is sufficient to pay me about $1,000 a month now. That’s because unlike the B’nai B’rith program, my nine years of contributions were allowed to grow like any other investment. And again, in the context of employment that represents about 25% of my work life, that’s a reasonable return on my investment.


When I left Hillel, I became an administrative employee of the University of Michigan, an organization with a very good retirement plan for every employee. As a department manager, among my responsibilities were training new employees and helping existing employees choose the retirement options that would best serve them. Of course that often meant referring them onto the University offices that specialized in employee education, but over my 25 years in administrative service, I did make it a point to stay current on retirement issues.


That brings me (at last!) to the reason I am writing today. One of the most common pieces of advice you will hear about collecting Social Security is that you should wait as long as possible before you file for it. However well-meaning the advisors and columnists might be, this can be very bad advice.


Social Security is a form of annuity. What most people don’t understand about this is that that means it has an end-point—usually when we die. When we die, Social Security pays out a pittance to (partially) cover funeral costs and the following month, it simply ends. This is different from many other types of savings, investment, and retirement accounts. Of course, you are free to purchase many sorts of annuities which, like Social Security, will terminate on death. But most other types of investment have no such end point. For example, if you own a rental property and make use of the rent you receive to supplement your retirement income, when you die, your heirs receive that rental property. If you have your retirement invested in the stock market, you receive both the interest and any gains the stock might earn and again, those shares pass to your heirs if you have not spent them before death.


Social Security rewards you for delaying accepting payment by increasing your monthly check for each year you delay. But the part they and many advisors don’t tell you is that should you lose the lottery and die before your mid-80s, you will actually collect less than you would have had you declared earlier. Suppose your Social Security check would be $2,000 when you turn 62. If you delay to the “full retirement age” of 67 (say), the check will rise to something like $2,500 per month. But remember that you have not collected $120,000 you would have received between ages 62 and 67. The additional $500/month you receive will not equal that $120,000 you have given up for 20 years! Now these are all round numbers and guesstimates, you have to do the math that precisely applies to yourselves to see when you will cross that finish line.


The first clear and convincing reason to take your Social Security at the earliest possible time is if you have good reason to believe that you will not live into your 80s. Possibly a serious cardiac or cancer diagnosis, perhaps just your knowledge of family longevity.
The second obvious reason is because you are unemployed or underemployed and simply need the money to live on. That is unfortunate because that is a case where delaying would give you a better retirement, but in the words of the great sage, “It is what it is.”


The third reason to begin accepting payment, even if you think there’s a good chance you’ll make it into your 90s and even if you don’t need immediately need the funds, is if you have good self-discipline and are capable of investing rather than spending the money. In most scenarios, if you take your Social Security and use it to invest in the markets or perhaps purchase rental property, you will do better—and maybe far better—than if you allow the government to hold on to it.


This is how I reasoned things for myself. My parents both lived into their 80s. I’m not a smoker and other than a bit of high blood pressure I have no significant health issues. Although there are no certainties in this life, those factors argue that I am likely to make it into my mid-80s. Therefore I decided against taking my Social Security when I first became eligible. I figured it would be nice to get those enhanced payments by delaying it. When I reached my mid-60s, I revisited this decision. I had now arrived at what the Social Security Administration terms “full retirement age.” (That was 67 for me, I believe it has now moved up to 68 for people contemplating retirement now.) Still, if I wait even longer (up to age 72) those monthly checks would grow even larger. And because I and my spouse are still working, we didn’t need the money.


But at that point, doing some math, I decided we’d be better off if I started to collect. The reason is not because we need the money for current expenses, but rather because I believe I can find better investments than the annuity represented by Social Security. We already had the usual spectrum of investment accounts held by middle-class Americans, so I bought rental property and I use Social Security to pay down the principle on those rental units. What that means is that when I do finally retire, we will own the rental units which will then be providing a steady income on their own. And as I said above, when I pass on, I’ll have something to pass on to my children.


The proverbial “bottom line” here is not that I made the best possible decision nor that you should do what I did. The advice I am giving you is to set aside simplistic answers from places like the Social Security Administration itself, or your H and R Crock tax adviser. Make sure you find a real expert, and carefully vet the advice you receive. There is no “one size fits all” solution—so make sure you understand the many alternatives that lie before you.

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