10 Oct 2014 When Should You Take Social Security?
Due to the large number of Baby Boomers in retirement or retiring soon, much is being written on the merits of delaying Social Security from age 62, (Early Age), to 66 (Full Retirement Age) or even waiting until 70 (benefits must begin). Forget the rules of thumb and the pat answers. This is one of those cases where ‘one size’ absolutely does not fit all. There are simply too many nuances and special considerations unique to each person for general advice to be worthwhile.
The oft-stated benefit for delay includes the fact that the recipient gains a full 8% increase each year he or she delays benefits. The delay ensures a higher guaranteed lifetime pension from the government which will increase with inflation every year. What’s more, the higher earner’s benefits are passed along to his or her spouse at death in the form of survivor benefits. Delaying benefits to gain the 8% increase also ensures a larger pension for the the surviving spouse.
To illustrate the complexities of making the best choices regarding when to take Social Security, let’s look at a real-life couple who’s names have been changed and their plan simplified to clarify the important points. John and Jane Sample have $1 million divided evenly between their 401Ks and joint brokerage account. Further, John plans to receive a $500,000 inheritance from his parents in five years.
One of the major considerations in determining the optimal timing of SS benefits is estimating how long you and your spouse expect to live. The question is not easily answered, but genealogy and current health can inform your projections. The table below shows the approximate value of lifetime cumulative benefits over the Samples’ life expectancy of 90 for each if they choose to take benefits early (62), at Full Retirement Age (70) or according to the primary strategy our analysis suggests. The Primary Age refers to the ideal strategy recommended by our analysis. The Short Life Span row illustrates the amount if John and Jane each lives to 80. The Normal Life Span row illustrates the amount if each lives to 90 and the Long Life Span row illustrates what can be expected if each lives to 100. The complexity of the decision is evident as is the range of benefits between choices.
The Primary Age strategy is generated by software we use from Social Security Solutions. In order to achieve the optimal benefit stream John and Jane are advised to do the following:
- John files and suspends benefits based on his earnings record in April 2020 at age 66 and 6 mos,which makes Jane eligible for spousal benefits at 66.
- Jane files a restricted application for spousal benefits only in the estimated amount of $1,318 in April 2020 at 66.
- John begins benefits based on his earnings record in the estimated amount of $3,478 in October 2023 at 70.
- Jane switches to benefits based on her earnings record in the estimated amount of $1,881 in April 2024 at 70.
- In October 2043 Jane switches to survivor benefits in the estimated amount of $3,478.
John and Jane also see from their analysis that their break-even is age 78. In other works John must live beyond age 78 to give his higher benefits sufficient time to replace the years between 62 and 70 that he delayed. At age 70 the couple is behind by $223,000. By age 79 they begin to realize positive cash flow in the amount of $23,000. By age 90 they will be ahead of the take-at-62 strategy by an estimated $327,000.
When we use our Monte Carlo engine to analyze John and Jane’s plan relative to their decision to take SS at 62 or 70, we find more compelling evidence to delay benefits. At the level of confidence we deem sufficient to meet or exceed all of their goals, we find that the Samples can spend $87,000 a year (adjusted for inflation) if they begin their SS benefits at age 62, but with the same level of confidence, they can spend an additional $5,000 per year if they delay SS benefits until age 70.
Following our advice to delay SS benefits until age 70 would mean that Jane and John would draw down their invested assets sooner and more significantly than if they started their benefits at age 62 or soon thereafter. This realization is where we spend a considerable amount of time and conversation with our clients to help them come not only to an optimal decision by the numbers, but one that they can live peacefully and comfortably with.
Regardless of the fact that the relative safety of a rock solid pension from the US government in the form of Social Security is more certain than cash flow generated from the capital markets, even by the best investment managers and financial advisors, the fact occasionally does not offset the discomfort of watching the nest egg erode faster than it might if supplemented by Social Security. If we learned through our discussions that John and Jane were overly concerned watching their portfolio decline we show them a comparison like the one below to help them see in objective terms the ‘cost’ of their assets of ‘buying’ a higher lifetime SS benefit.
The green and blue lines above represent the relative differences in portfolio values over the Samples’ lifetime as resulted at the 75th percentile of 1,000 virtual lifetimes lived through random capital market returns. The green line representing the option to delay benefits until age 70 obviously places a greater drain on the portfolio values without the offset of $37,000 in SS benefits starting at 62.
Just how much difference is there between the two options? At age 65 the difference in portfolio values is $500,000. The differences decline for the next few years then peak at $500,000 again at age 73. Then as you can see, they begin to narrow until they eventually cross at age 93 for Jane and John. We plan until age 92 for John and 94 for Jane, by the way.
At this point John and Jane have more than rules of thumb and their imaginations to make an informed decision that’s right for them. They may opt to take early benefits or they may be comfortable taking the risk of waiting until age 70 to take their benefits on the chance they will outlive age 78 when the advantage of waiting is realized. To do the latter they will have to decide they are comfortable watching their investments decline initially as they spend to fill the SS gap. Either way, they can rest comfortably in their decision knowing we continually monitor their plan and investments to ensure adequate confidence they will meet or exceed every goal they value for the rest of their lives.