By Dr. James M. Dahle, WCI Founder
As a general rule, you should take Social Security as late as possible. There are two main exceptions. The first is if you are likely to die soon. The second is if you are married to someone who is expecting a higher Social Security benefit.
Yet I keep running into articles that suggest you should take Social Security early. They're usually full of flawed thinking and outright errors. The most recent one was by Michael Keenan and published on MSN. To make matters worse, it was one of those clickbaity slide shows designed to increase page views and sell more ads. I'll save you time and summarize Michael's arguments. Then, we'll take them one by one and debunk them as much as possible.
- You're planning your end of life care
- You have a shorter life expectancy
- You need to pay down debt
- You can't work anymore
- You're only working part-time
- No one else is relying on your benefits
- You already have your 35 highest-earning years
- You expect your investments to grow faster than the increased benefit
- You want to start a business
- You're concerned Social Security will disappear
Yes. Those are seriously his arguments. Let's debunk them.
#1 You're Planning Your End of Life Care
I mentioned above that if you expect to die soon, you might as well take your Social Security early (assuming you're not married and leaving behind a spouse who could really benefit from you having a higher death benefit). So sure, if you're on hospice, go ahead and take your Social Security.
#2 You Have a Shorter Life Expectancy
Only had nine things on your list, huh, Michael? Sounds like the editor made you repeat one so you could have a more clickbaity list of 10. This is the same as the last one. Yes, if you're going to die soon, you might as well take your Social Security. Not that it really matters for you, though, since by virtue of your early death, you are very unlikely to run out of money. But your heirs may appreciate getting a little extra.
#3 You Need to Pay Down Debt
Wow. Well, I guess it can be true. If you've got a bunch of 29% credit card debt that you plan to actually pay off, that could be worth giving up the long-term value of having a larger Social Security benefit. But just a little debt? Or a 3.5% mortgage? No way. If you have enough debt that it would actually be a good idea to take Social Security early to pay it, you're probably not going to be paying off the debt anyway. Hopefully, it's unsecured.
#4 You Can't Work Anymore
What? Now Social Security is like disability insurance or something? Just not being able to work or not working by choice is certainly not an excuse to take Social Security early. At that point, the question is: do you live off your savings and delay Social Security, or do you take Social Security and let your savings grow? The right answer here is to delay Social Security. Now, if you have no savings and you cannot work and your alternative is to starve to death before you ever get to age 70, then sure, you'll have to take Social Security early. Like many Americans, you have failed at the retirement savings game, and you are exactly the reason why we have a Social Security program at all. It's supposed to be a safety net, so folks like you don't have to eat Alpo and sleep in a cardboard box. Go ahead and take it early.
#5 You're Only Working Part-Time
Say what? This is not a reason to take Social Security early. If you're a very low earner, it might mean your Social Security is taxed less than it would be if you are working full-time, but that's not a reason to take it early. Even the author seems to agree with me. He writes:
If you claim Social Security prior to your full retirement age while still holding down a part-time job, you might have your benefits reduced if your work income exceeds the annual limit. For 2021, if you are under full retirement age, your benefits go down by $1 for every $2 your income exceeds $18,960.
That's a reason NOT to take Social Security early, not a reason TO take it.
#6 No One Else Is Relying on Your Benefits
No. Even if you're single, you should still try to delay Social Security. The only time this one is true is when combined with an actual good reason to delay, like a short life expectancy.
#7 You Already Have Your 35 Highest-Earning Years
What? No. This might be a good reason to stop working, but it has absolutely nothing to do with whether you should take Social Security early. Additional work isn't going to increase your Social Security benefit, but delaying when you take that benefit still works exactly the same.
#8 You Expect Your Investments to Grow Faster than the Increased Benefit
In some ways, this is not a bad reason to delay Social Security. But the truth is that if you expect your investments to grow faster than the increased benefit, you're 1) probably mistaken and 2) definitely not adjusting for risk.
Remember, delaying Social Security is a GUARANTEED investment. It should be compared to things like bonds, CDs, and high-yield savings accounts. It shouldn't be compared to risky investments like stocks, real estate, and small businesses. This is why you're better off spending the bonds in your portfolio and delaying Social Security. Both have similar risk, and Social Security has a better return.
Maybe it would be helpful to actually quantify the return you get from delaying Social Security. Luckily, one of the world's top Social Security gurus has already done this for us. Mike Piper argues that you should compare the expected return on TIPs to delaying Social Security to determine whether you should take SS early and invest or delay it. His argument is that TIPS are backed by the same government as Social Security and both are indexed to inflation in the same way. Pretty good argument. To take it further, since delaying Social Security provides a better yield than TIPS do, you should delay Social Security.
Mike makes other good points, too. For example, he points out that tax-wise you are generally better off delaying Social Security for a couple of reasons. First, it gives you more years to do Roth conversions before taking it. Second, you also have a larger amount of income in retirement which benefits from the fact that, at most, only 85% of it is taxable income. Plus, only 13 states tax Social Security benefits, which has a similar effect in making delaying more advantageous.
Mike also points out that the real benefit of Social Security is the insurance function it plays. It is the backstop. The risk is that you live a long time and outlive your money. Social Security defends against that risk. The larger the Social Security benefit, the better your defense. The risk isn't that you die early, because in that scenario, you don't run out of money.
Finally, Mike points out that the rate of return from delaying Social Security IS NOT the commonly cited 8%. That's just how much your benefit goes up each year (and even that is actually 7.2%). But in order to get that, you also don't get Social Security benefits for that year. So you can only really calculate the rate of return on delaying once you know how long you will live. You can work out what it would be for average life expectancies. If you live longer, it's higher. If you live a shorter time period, it's lower.
Let's look at what it would be at your life expectancy. For a male, Mike calculates a return of 1.8% + inflation. For a female, it's 3% + inflation. So, if inflation is 1%, that's a 2.8%-4% return. If inflation is 3%, that's a 4.8%-6% return. If inflation is 5%, that's a 6.8%-8% return. Remember, this is a risk-free return. Where else are you going to get a risk-free 5% or 6% these days? You're not. Bonds and CDs are paying 1-2%. A risk-free 5-6% IS AWESOME. You should take it. You're not going to out-invest that, at least not without taking on a whole lot more risk (leverage risk or market risk). If you're going to take Social Security early to invest, you had darn well better not have any bonds in your portfolio.
#9 You Want to Start a Business
This one plays a little bit on the last. The idea is that you're going to make so much money from a business that it will be a good investment that will provide a better return to you than the 5%-6% guaranteed that you'll get from delaying Social Security. But the same problem rears its ugly head—risk. It's risky to start a business. Most businesses don't provide an awesome return. In fact, 20% of new businesses fail within two years, and 65% fail within 10 years. And that's for normal, healthy, young, hard-working folks starting businesses—not people starting businesses at age 62. Besides, most businesses don't actually have any value. They're just people creating a job for themselves. Giving up tens of thousands of dollars in future income to invest in a business that will have no actual value when you're done working is a terrible trade-off.
This one is true if you can somehow create a real business that makes lots of money and becomes valuable even without you and can be sold for lots of money. But that is such a small percentage of businesses started by people at age 62 that I think this is a terrible reason to take Social Security early. Again, don't you have any other money you can use to start the business? If not, what makes you think you have the business mind and drive it will take to create a successful business in your 60s?
#10 You're Concerned Social Security Will Disappear
Yes, if Social Security went completely kaput, you would be better off getting whatever you could from it before it does so. But let's consider the likelihood of that happening so you can understand why this is a non-concern. If no changes are made to Social Security, the Social Security Trust Fund will run out of money at some point in the next 15 years or so. What does that mean? Does that mean Social Security benefits go away completely? No. That means they'll be cut to about 77% of what they are supposed to be. Seventy-seven percent of a higher amount is better than 77% of a lower amount. So, delaying still works out better.
Besides, I want you to point out to me the 51 US senators who are going to abolish Social Security. Go ahead. Name them. That's what I thought. Maybe you can come up with a handful. But that's it. It's an incredibly popular program. It should be. It always has been. Go back to 1935 when it was created. What was the vote total in the Senate? Sixty of 69 Democrats voted for it, and only one voted against it; 16 of 25 Republicans voted for it, and only five voted against it. Over 90% of representatives in the House voted for it, too. Those are veto-proof majorities.
Besides, even if it were changed for younger people, older people would be grandfathered in. Democrats like it. Republicans like it. Old people like it (and they vote!). Young people like it. Trust me when I say it's political suicide to try to get rid of it. You might not like it, but guess what? You're in a pretty lonely camp.
Unlike Medicare, Social Security's problems are pretty easily fixed. You simply do one or more of the following:
- Increase the wage limit on the tax
- Increase the tax percentage
- Decrease the inflation adjustment
- Delay the age at which you can take Social Security
Voila! The problem is fixed. Not complicated. When Congress has to do it, it'll do it. Social Security isn't going anywhere. If you are taking the money because you're worried it is, you're making a mistake.
Now, there are a fair number of Americans who actually should take Social Security early. There are a lot of people in poor health in their 60s. There are also a lot of people who failed the retirement savings game, and they can no longer work. But among the readers of this blog—who presumably have not failed at the retirement savings game and, by virtue of their health-related knowledge and wealth, are likely in better health—it is a very small percentage who should take Social Security early. You're probably not in it.
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What do you think are the reasons for taking Social Security early? Do you agree or disagree with my arguments that most in the WCI Community should delay taking it? Why or why not? Comment below!