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How Does Income or Education Level Affect Social Security/Retirement Planning?

A recent paper published by the Center for Retirement Research at Boston College (authored by Barry P. Bosworth, Gary Burtless, and Kan Zhang of The Brookings Institution) looks at how mortality rates are affected by socioeconomic status. As the authors put it, “A large empirical literature has established that there are significant differences in life expectancy between people with high and low socioeconomic status as measured by indicators such as income and educational attainment.”

For example, if we look at women age 50-74, for those with a college degree, the mortality rate (i.e., the likelihood of dying in a given year) is 49% lower than the average mortality rate. In other words, if you’re a woman between the ages of 50 and 74 and you have a college degree, you are only half as likely to die each year as the average woman in your age bracket. (For men with a college degree, the mortality rate is 38% lower than average.)

And for women age 75 and above, the mortality rate for those with a college degree is 20% lower than the average mortality rate for women in that age bracket. (For men, it is 27% lower.)

And a very similar effect is found if you sort by career earnings rather than education level. For instance, for people in the highest quartile of household career earnings:

  • The mortality rate for women age 50-74 is 46% lower than the mortality rate for all women in that age range,
  • The mortality rate for men age 50-74 is 34% lower than the mortality rate for all men in that age range,
  • The mortality rate for women age 75 and over is 19% lower than the mortality rate for all women in that age range, and
  • The mortality rate for men age 75 and over is 23% lower than the morality rate for all men in that age range.

Obviously, this raises important questions about social justice and about what policy actions, if any, should be taken. But because our focus here is personal finance, we will set those questions aside and look instead at how this information affects financial planning.

The big takeaway is that if you have a college education or if you have had higher than average income throughout your career, your life expectancy is meaningfully higher than average — unless of course you have a known health condition indicating otherwise.

As you might imagine, for those with above-average education/income this is a strong point in favor of waiting to claim Social Security benefits (because doing so works out well in scenarios in which you live a long time).

But it has other effects as well. Specifically, after delaying Social Security to age 70, it would be a point in favor of further annuitizing via an immediate lifetime annuity or a deferred lifetime annuity. And it would be a point in favor of using a lower withdrawal rate for the non-annuitized portion of the portfolio.

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