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Hello and welcome to 21st Century TV. I thought for today’s talk we’d have a history lesson. The history lesson is this: There is a woman named Ida Mae Fuller of Vermont. She was the very first Social Security recipient—she received check 001. This was in 1940 and it was for about twenty two dollars per month. Ms. Fuller lived to be one hundred years old so she collected Social Security until the age of one hundred. Now, why a little history lesson today?

First baby boomer takes social security

Because something very important occurred about three or four weeks ago. Three or four weeks ago, a woman who is considered to be the very first baby boomer—I know some of you might be laughing that someone actually has that distinction but she is considered to be the first baby boomer—she took her Social Security. She qualified; she applied for it, at age 62.

Think about this. Ms. Fuller, who retired in 1940, lived to be age hundred, and now we have the first baby boomer. There are tens of millions of baby boomers. The first one took Social Security at age 62.

This is important because there is this huge demographic tsunami. All of these people are now going to begin to take Social Security. It has, of course, lots of implications for things like inflation, interest rates, etc. But what we are really focused on here today is, how does this relate to managing money and managing money in the 21st century? Someone like Ms. Fuller who retired in 1940 likely had her money in a bank account and just lived off of the interest.

Living off interest doesn’t cut it anymore

Today those old rules not only don’t work, because—think about if a bank account pays four or five percent. That means that every million dollars generates, maybe, forty or fifty thousand dollars of income. So, the old rules not only don’t work but, in fact, in many ways hurt people.

Because preparing for a 21st century retirement means that you have to prepare the money to deliver income for decades—for, literally, decades you have to have a growing stream of income—it’s going to require a very, very different point of view. It’s going to require different ways looking at old rules and different ways of assessing risk, one of those risks being that the income is going to have to provide for many decades. It’s going to be not only as much about how much money you actually have but, I think, in ways it’ll be more about how do you actually manage that money. How do you actually manage income from the money that you have? That’s something that we are very much focused on here at 21st Century Income.

Thank you for tuning into 21st Century Income TV. What I want to talk about today—I read a very interesting editorial in this week’s Barron’s. The editorial spoke about extending Social Security benefits—meaning taking Social Security at the last possible moment as opposed to taking it at the first chance, which is at age 62. I’m going to relate that to a product people often hear about called annuities. So, let me explain.

Often, we hear about annuities, buying deferred annuities. The argument for buying a deferred annuity is that the income that you earn is tax-deferred while you are working or until age 59 and a half. But what it’s really presented as is a way to convert the balance into lifetime income from the insurance company.

So what really happens when you buy an annuity?

What happens when you buy an annuity is you are saying to the insurance company, “Here is my money,” and you are giving up control of that money in exchange for the insurance company paying you at some future date a sum of money for as long as you live. That’s actually quite similar to Social Security: Social Security pays you an income for as long as you live.

So why buy an annuity?

So one of the things we have been thinking about is that these annuities, deferred annuities, are, of course, quite expensive. There are quite a number of various fees built into them. You are giving your money to the insurance company in exchange for getting this lifetime income; the cost of that is quite a lot of fees.

We’re thinking here, in working with clients, that maybe you need to restructure or rethink your personal investments so that when you retire—let’s assume you retire at age 62—so at age 62, your personal investments are structured in a way that will give you the level of income you require to not take your Social Security. Doing so, you are able to hold off taking Social Security until the last possible moment. The benefits could be as much as a third higher than if you retire at age 62. So by doing that, you are increasing your retirement benefit later.

If you recall, one of the things we always talk about here on 21st Century Income is dangers, strengths and opportunities of living in retirement in the 21st century. The biggest danger is that you may live for many, many decades and you are going to need a very high sustainable source of income that goes out well into the future.

A way to do that in a cost-effective manner could be to delay taking Social Security until the last possible moments. That requires you, of course, to rethink your investment program between the age of 62 and the age you take those social security benefits. Thank you.