Delay Taking Social Security With a HECM Term Payment

July 10, 2014, Reviewed March 14, 2017

For most seniors, waiting until age 70 before collecting social security, as opposed to taking a smaller amount earlier, is an excellent investment. A typical senior who could draw $1350 a month at age 62, would see the draw increase to $2376 at age 70. Yet more than 2 of every 3 workers eligible for social security take it early. The major reasons are time preference, risk of non-payment, and income shortage. The last may be the most important, and for homeowners at least, it is the easiest to remedy.  

Time Preference

Most people prefer money now to money in the future, even when all uncertainty connected with receiving money in the future has been eliminated. This time preference seems to be built into the human psyche. In addition, receiving money now eliminates the risk that the payments promised in the future will not actually be paid.  Interest rates reflect both time preference and risk of non-payment.  

One way to view the decision about taking social security early or late is to ask whether the implied interest rate received by the senior who waits is worth the risk? That rate is about 7-8%, meaning that the payment to the senior who waits rises by 7-8% a year. I view that as more than adequate compensation for the risk, which is very unlike the risk of not being paid on a note or a bond.

Risk of Non-Payment  

The only seniors for whom waiting to begin social security would be a poor investment are those who anticipate a relatively short life span. Unlike a bond, where non-payment result s from default by the promisor, on deferred social security non-payment results from the death of the recipient. If you die before reaching 70, you have left all the money you could have drawn on the table. In fact, if you delay until age 70, you don’t break even in the sense of recovering all the payments you did not receive between 62 and 70 until you have collected for 11-12 years – or until you are 81 or 82.  After that, it is all gravy.  

It is doubtful, however, that the decision to begin receiving payments early is mortality-based in more than a handful of cases. Few people know how long they are going to live.  

Mortality Risk and Poverty Risk 

The counterpart to the mortality risk involved in taking the payments late is the poverty risk associated with taking payments early.  The payments to those who begin early are lower for the remainder of the senior’s life, which can mean the difference between poverty and comfort in old age. Many seniors don’t give that a lot of thought.  

In my scheme of values, avoiding poverty risk is more important than avoiding mortality risk. If I don’t avoid poverty risk, I may be forced to endure poverty in my old age. If I don’t avoid mortality risk, in contrast, I won’t be around to lament the money I didn’t draw.  

Income Shortage 

Probably the most important factor inducing seniors to begin drawing social security early is a need for more income at the time. Relieving their current income shortage outweighs the risk of incurring an even worse shortage in the future. However, seniors who have some equity in their home can use a HECM reverse mortgage to draw income while they defer taking social security.  

Using a HECM Reverse Mortgage to Supplement Income  

I recently revised the HECM calculator on my web site so that it can easily be used to determine whether there is enough equity to provide the income- supplement required by the senior for a limited period. The calculator will indicate your HECM borrowing power, which depends on your age, the value of your house less any existing mortgage debt, and the HECM interest rate and settlement costs. It will also calculate the borrowing power required to generate the income you need for the period until social security kicks in. 

For example, if you are now 62 and want to draw $1,000 a month for 8 years, at the interest rates on June 30, 2014, you need equity in your home (property value less mortgage balance) of approximately $156,000. This would use up all your HECM borrowing power. Or you could draw $500 a month and use only half of it. If your home equity was $312,000, you would use only half of your borrowing power to draw $1,000 a month for 8 years, leaving the remainder as an unused credit line that could be accessed anytime in the future.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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