Surgeon, physician, and blogger Cory S. Fawcett published a blog post a few months ago advocating that physicians take their Social Security as soon as they can. I told him that I thought he blew it with that post but thought it might make for a very interesting Pro/Con post on the site if I wasn't able to change his mind. We set up the ground rules so that we were both operating from similar assumptions with our numbers. We assumed a single doctor who had made $200K a year during his career and was stopping work at age 62 with a $2M nest egg composed of 60% tax-deferred money, 30% taxable money, and 10% Roth money. This doctor was facing a decision of whether to start taking Social Security right then or delay it to 70. We'll start with Dr. Fawcett's post.
Take Your Social Security At Age 62 – Dr. Cory S. Fawcett
High-income earners who retire early must decide when to start taking their social security payments. The discussion regarding what age to begin taking your money, earlier (62) vs later (70), is a bit controversial with each side often getting very worked up about their choice being the only good option. I (Dr. 62) favor earlier and Dr. Dahle (Dr. 70) favors later. Earlier means less money per year but Dr. 62 gets an eight-year head start on Dr. 70.
An important thing to remember is that both choices make a good addition to one’s retirement income. It really comes down to which ideas are given the most weight in your own life to determine the best answer for you in this debate. For the purpose of this discussion, both Dr. 62 and Dr. 70 have enough other assets that this will be considered bonus money. So to be perfectly clear, it’s a win with either choice, so don’t agonize too much about this first world problem.
According to an article titled “Trends in Social Security Claiming” by Munnell and Chen published in May 2015 by the Center for Retirement Research at Boston College, 62 was the most popular age in 2013 for Americans (that’s everyone, not just high earners in early retirement) to begin Social Security payments. Age 62 was utilized by 42% of men and 48% of women. The least popular age to begin taking Social Security was age 70+, utilized by only 2% of men and 4% of women. Seems the bulk of America is with me on this. Being the most popular decision doesn’t necessarily mean it’s the best decision. But in this case, I think the masses are right.
How Long Will Retirement Last?
Since no one knows their actual life expectancy, we need to think in terms of odds when considering this question. According to the actuarial data from the Social Security Administration, at age 62, the average male will live to about age 82 and only about one in five will make it to age 90. Sadly, about one in eight will not live to age 70 and will miss the boat completely if they delay taking their Social Security. The average 62-year-old female will live to about age 84 with about one in three surviving to age 90. One in ten will not live to age 70 and will sadly miss out if they delay.
Dr. Cory S. Fawcett
Keep in mind that during the earlier half of our retirement we will be healthier than in the latter half. There may be several years near the end of our lives that we are not fit enough to do much. We only have three choices to consider for the use of our social security money: We can invest it, spend it, or give it away. Let’s discuss the first two options.
What If We Invest The Money?
Since we don’t need the money, we can invest it to increase the value of our estate. The chart for these calculations can be found on page 169 in my book “The Doctors Guide to Smart Career Alternatives and Retirement,” where I discuss this issue at greater length. We can spend our social security money to avoid taking money out of our protected plans (401(k), IRA, Deferred Compensation….) and thus get an effective return equal to our retirement portfolio.
To put this in real numbers, I will use what the Social Security Administration says my benefits are estimated to be for my own retirement. They estimated that I will receive $1,868 a month ($22,416/year) if I begin my withdrawal at age 62, or $3,511 a month ($42,132/year) if I wait until age 70.
Dr. 62 will begin compounding his investment returns eight years before Dr. 70, but Dr. 70 will get to make a larger investment each year when he starts. Using a 6% return, a figure that is reasonable to earn with long-term investing and minimal risk, the math works out such that Dr. 70’s account value will catch up with Dr. 62 at about age 90, if Dr. 70 lives that long.
With the option of investing the money, only one-fifth of the men and one-third of the women will live long enough to do better by waiting until they reach age 70 to begin their investing if they average a 6% return. If we modify the rate of return to 7%, Dr. 70 will catch up at age 98. If we use an 8% average return, Dr. 70 will never catch up. This is consistent with the advice that the earlier we begin investing, the better. With compound interest, time is our best friend. Dr. 70 also has a one in eight chance that he will die before he reaches age 70 and thus collects nothing. So if we want to invest this surplus money, the odds favor an early start by beginning our social security benefits at age 62.
Note that the above example overestimates the benefits Dr. 70 will receive. The Social Security Administration makes the assumption that Dr. 70 will work and continue to contribute to Social Security right up until age 70. In reality, since Dr. 70 will not be working between the ages of 62 and 70, he will likely have a lower benefit and take even longer to catch up with Dr. 62 than this example portrays.
What If We Want To Spend It?
I think this is what most people will do with the money, myself included. Dr. 62 will have an extra $22,416 a year income. After paying 25% income tax on it, he will be left with $16,812 to spend.
Dr. 62 loves to take cruises. Using the price of a room for two with a balcony and including the listed port taxes, Dr. 62 can purchase seven one week cruises to the following places: Mexico, Alaska, Eastern Caribbean, Western Caribbean, Southern Caribbean, Mediterranean and Australia. Dr. 62 will get eight extra years of fun for a total of 72 cruises before Dr. 70 will begin having fun with his money, unless one of them is in the 13% who don’t live to age 70.
These cruises will occur during the best years of Dr. 62’s retirement, before his health/stamina begins to decline and he might lose the ability to travel. If he looks for sales, last minute deals, picks less expensive destinations, or takes a lower priced cabin, he can boost this number and get even more cruises before reaching age 70.
Dr. 62 wants some other options as well, like wintering in Arizona. Each year’s Social Security money will cover the rent for a furnished 2 bed, 2 bath 2,000 square foot house in Sun City (a snowbird community near Phoenix, AZ) for six months, including the cost to travel there and back. This rental comes with satellite TV, internet connection, swimming pool, fitness center and community group activities.
Dr. 62 will enjoy these vacations compliments of Uncle Sam for eight years before Dr. 70 receives any of his money. Look into your favorite vacation options and see how far the money goes.
Summary
If your priority is to have more fun in life and travel in the earlier years of retirement, you are better off taking the money at age 62. If your priority is stockpiling money to leave to your heirs, you will likely leave them more if you take the money at age 62 and invest it, getting an eight-year head start. I didn’t even get into the option of giving the money to those who need it in your family or charities you support for eight extra years. Taking the money at age 62 and using it while you can is the guaranteed choice. A bird in the hand is worth two in the bush.
You should take the points Dr. Dahle and I make and eliminate the ones that don’t pertain to you and then make your decision. If you will not be doing any Roth conversions, then disregard that advice as not pertaining to you. If you will not be investing the money, then don’t use it as one of your points to consider. After weighing what is important to you, the decision will likely be clear as to what age you should begin taking your social security benefits. This is not really a math problem, it’s a priority/lifestyle issue.
Most Docs Should Delay Their Social Security to Age 70 – The White Coat Investor
Let's start with a few things that need to be said up front when it comes to Social Security. First, if you've got metastatic cancer when you turn 62, then yes, by all means, you should take Social Security right now. Likewise, if your alternative is eating Alpo. That's not what we're talking about here. We're talking about someone with the means to do either without any significant hardship (see assumptions above) like most readers of this site. Also note that we're not talking about a spouse, particularly a lower earning spouse. In those cases, it can make a lot of sense for one partner (usually the higher earning one) to wait until 70 and the other partner to take their payments earlier.
Risky Returns Vs Guaranteed Returns
Let's start with Dr. Fawcett's main argument- that if you take your Social Security payments at 62 and invest them (or rather leave your investments invested instead of spending them) then you'll come out ahead of delaying your payments until 70. This argument relies on you earning market returns on that money. Market returns aren't guaranteed. It's within the realm of possibility that your investments have a negative return over that 8 year period and even more likely that your investments underperform the return inherent in delaying your Social Security. Remember that every year you delay Social Security, even without working, your Social Security payments go up by 8%. Now that's not an 8% return on your money since you are giving up a year's worth of payments in order to get that higher payment, but it's not a 0% return either. And it's guaranteed, at least as much as anything coming from our government is (and maybe more considering this is the most popular program in the government.) So what is that return? Wade Pfau calculates it out at 3% real (i.e. after-inflation.) Guaranteed.
Know anywhere else you can make a guaranteed return of 3% real? I don't. 20-year TIPS are yielding 0.8% real as I write this. 5 year CDs are yielding 2.5% nominal. Hmmmm….3% real or 2.5% nominal. Tough choice. Money market funds and high yield savings accounts are paying 1% nominal. So if you want to beat the return that Social Security is offering you, you're going to have to take some significant risk. If you're taking Social Security early because you want to maximize your returns, you'd better not be investing any money in bonds or CDs. Even then, many investment authorities are arguing for relatively low stock returns in the next decade given our current low yields or high valuations. Now my crystal ball is always cloudy, but my point is that you're going to have to do pretty well investing to come out ahead taking SS at 62 in order to invest it. Mike Piper in his excellent Social Security Made Simple calculates the return for delaying at 6.67% nominal. How much do you want to bet that your investment returns will beat that? Probably not that much, especially during your 60s- the decade when sequence of returns risk is highest.
There's a reason most unbiased personal finance and investing gurus recommend delaying Social Security to 70 if possible- because it's the right move for almost everyone. Consider all the people that Dr. Fawcett finds himself on the opposite side of this argument from: Mike Piper, Wade Pfau, Jane Bryant Quinn, Jonathan Clements, Paul Solman, Jason Zweig, William Bernstein, James Lange, Zvi Bodie to name a few.
Deferring Retirement Account Withdrawals?
Another key point in Dr. Fawcett's argument is that taking Social Security early allows you to not tap your retirement accounts allowing that money to continue to compound in a tax-protected manner for another 8 years. While that is a good thing, I find that argument flawed for several reasons:
- Most docs (such as our assumed doc) have a taxable account to spend during those years. In fact, most of them have a taxable account large enough to not only live on, but also do significant Roth conversions with during those years (more on that later.) So they're not touching their retirement accounts either way since it is generally smart to whittle down your taxable account before touching the retirement accounts. (If you're not convinced of this, I suggest reading James Lange's Retire Secure.)
- Having a larger payment at age 70 allows more money to be left in retirement accounts after 70, providing a similar and potentially even larger benefit
- Leaving money in retirement accounts causes you to have larger Required Minimum Distributions (RMDs). Now that's not the end of the world that many think it is, but some would view it as a downside to Dr. Fawcett's strategy.
Longevity Insurance
Now that we've dispensed with Dr. Fawcett's arguments from his original blog post, let's move on to what I see as the most important reason why you should delay your Social Security payments to age 70 if possible- the longevity insurance aspect. What is longevity insurance? Well, sometimes it's a name applied to delayed fixed annuities, but in this case, I use it more broadly for anything that protects you from running out of money before you die. Social Security payments are guaranteed to pay out, indexed to inflation, every month from now until you die. Now you can take them at 62 and get a certain amount of money, or you can delay until age 70 and get a 76% (real) larger payout. Your choice. But I can tell you which one you will wish you had chosen if you do end up running out of money. That “insurance” aspect has some very real value that isn't taken into account in those calculations above. Basically, if you die young, you didn't need the Social Security anyway, but if you live a long time, you'll be glad you waited until 70. By the way, it's tough enough to find an inflation-indexed pension or SPIA these days, so you might as well get as much of the best one out there that you can, which is delaying Social Security.
Spousal Longevity Insurance
But wait, there's more. While our assumptions were for a single doc, if you are married, that longevity insurance also applies to your spouse. If your spouse will be getting 1/2 of your payments, that makes the difference even larger. If you die early and your spouse lives a long time, they get your now larger payment. Chances of one of you living into your 90s are actually quite high. And if that happens, taking Social Security late will have been the right move.
Roth Conversions
Another issue with taking Social Security early is that it screws up one of the best estate planning (and asset protection) maneuvers around — Roth conversions. The way this typically works is that the early retiree starts doing a Roth conversion each year between retirement and the age at which he takes Social Security. Maybe he converts up to the top of the 15% bracket or the 25% bracket or whatever, voluntarily paying tax now in order to effectively move money from his taxable and tax-deferred accounts into a tax-free account, where it will never be taxed again during his lifetime or that of his heirs, where it receives better protection from his creditors, where it is more easily passed outside of probate, and where it will not be subjected to the potential inconvenience of RMDs. If you start taking Social Security at age 62, the amount of space between your income and the top of the 15% or 25% (or whatever) bracket will be dramatically reduced for those 8 years, decreasing your ability to use this powerful technique.
Not Actuarially Sound
Here's another little-known secret about Social Security. It's supposed to be actuarially neutral as to whether you take it early or late, but it actually isn't. You're actually more likely to live past the break-even point than to die before it (especially with our gradually lengthening life expectancies). Not so with SPIAs, which actually assume you're healthier than average since you're buying an annuity. But you also get to benefit from this well-described benefit- annuity purchasers live longer. The longer you live, the more you get, so you're incentivized to be healthy and live a long life. That can't possibly hurt! At any rate, delaying Social Security gives you the guaranteed income you need without purchasing a SPIA (or as large of a SPIA) and at a better price.
A Specific Rebuttal
The rest of this post was written before seeing what Cory submitted for this Pro/Con. This paragraph was written afterward. Under his “spend it” section. Dr. Fawcett suggests those who take SS at 62 get to take an extra 72 cruises. While I think taking 72 cruises in your 60s is a good way to make sure you die before 70, his argument has a major flaw- the retiree NOT taking Social Security at 62 can purchase those exact same 72 cruises using his retirement nest egg because he won't have to rely on it as much after 70 because he's going to get such a larger Social Security payment. Money is fungible. A good way to think of it is do you want a smaller portfolio and a larger SS payment at 70 or a larger portfolio and a smaller SS at 70? When you delay to 70, you're essentially using a larger part of your nest egg to buy a particularly well-priced inflation-indexed SPIA. In addition, his argument about how most Americans take it at 62 reminded me of the famous marshmallow experiments and we all know how that turned out.
In conclusion, I was appalled to see Dr. Fawcett advocating that physicians take Social Security at age 62. Sure, that'll work out better if you earn 25% a year on that money or die early, but for the rest of us mere mortals, we're going to be better off waiting until 70 most of the time.
Weigh in on the debate! At what age are you planning on taking Social Security? If you've already begun taking Social Security, how did taking it earlier or later affect your retirement? Comment below!
I am on the 70 year side after reading Clements book, How To Think About Money (thanks for the recommendation and link, by the way).
The odds of living past 70 these days is pretty good. Clements makes the argument that we need to be less concerned with not living long enough and more and more concerned about living too long and our money not lasting. I do not intend to depend on social security as a form of my retirement, but since its there I look forward to taking advantage of it. Really, its just one more thing to pass along to (hopefully) my wife and myself as we get older.
Good pro/con.
I think like anything in finance, it depends. The metastatic cancer example is a good one, but what about a retiree that is obese, smokes, and has diabetes? I don’t think the comment about “25% a year on that money” is a fair one. That line should read “3 percent real.” It comes down to probability and is a similar problem to investing or paying down debt. There is a high probability that an investor can beat 3 percent real, and the assumption of the debate is that you don’t need the money anyway. Has there been a 20 year period in history where dollar cost averaging into an index fund did not get you at least 3 percent real? Even an investor starting in 1929 and DCA for 25 years returned 8 percent nominal. What about an investor starting in 1913 and ending in 1933? I don’t know the answer to that question but the result would be interesting. Even if it came to lower than 3 percent real in the 1913 example, what are the odds that the terminal date is the in the midst of the world’s greatest depression? And, even if it were, you did not need the money anyway and you took a mathematically sound approach. I think “risky returns” versus “guaranteed returns” should read “there is a substantially higher probability of beating 3 percent real over a 20 year dollar cost averaging program, but this is not guaranteed.” I believe Dr. Fawcett should be congratulated on going out on a limb and disagreeing with the conventional wisdom. These posts need to be completed so that the audience can tease out the issues that are pertinent to their situation.
I come down on the 70 side. I’m not appalled, but rather intrigued by Cory’s arguments. He and I discussed this in Dallas. He is an intellectual heavyweight with a lot of investing experience so I value his opinions. Still, I can’t turn down a government guaranteed 8% return. I hope to work until 70 anyway.
Who knows though all my opinions may change once I reach my 60s. I’ve seen people change their opinions and say “I could use that money right now and who knows about the future” and take it earlier than they had planned.
I think it’s fairly straighforward math… look at the NPV of the two values and see how long you have to live to “break even,” then decide which path is better for you. If your nest egg is huge and you want to enjoy some of it now, take it at 62. If your nest egg is borderline and you need the longevity insurance (or would just sleep better at night with it), take it at 70.
You’re ignoring the value of the insurance.
I think if you’re “appalled” that someone might have a reasonable argument for some people to examine taking SS at 62, then you need to find some room for nuance.
Would you prefer shocked, surprised, or disappointed? I think he’s giving bad advice, so I’m calling him out on it. I listed the exceptions where I think nuance is appropriate in my portion of the post. Beyond that, I think it’s bad advice not something where there is room for nuance.
WCI, I have enjoyed your tone in the last few months in the content. You are “appalled” by this, or using a DAF is a “jerk move”. I think some of it is directed at creating controversy, and some of it is just how you feel. I would use the same language if I was talking with friends. I applaud you for it, even if I don’t agree with your opinions sometimes. Please don’t water down your opinions for the PC crowd. Great pro/con list, and great discussion. Thanks
Tone is hard to get right on the internet. Glad you think I’m getting it right. Obviously not every one does. I try to call it like I see it while still being respectful. If that happens to create controversy (and page views) so much the better.
Entirely person and situation specific.
There is no reason to believe I should do any better than my genetics and VERY few males in my extended family going back for generations (on Ancestry.com) have broken age 80. There are about three males in ten generations that got to see 81-85.
My dad lived to age 79. His dad lived to age 76. Both died of Alzheimer’s. So did six of nine of my father’s siblings and his mother. My maternal grandfather lived to age 73. My dad’s last good year was about age 73. My father-in-law’s was about age 75, my two grandfathers had their last good year at about age 70. All of these people smoked. I don’t. This might be worth a couple of years of intact cognition/longevity.
One has to pick a number for their death (assuming no weird cancers, MVA, and other ways to die younger) and plan based on that. Since I ran a geriatric psychiatry unit for eleven years and saw all the ways the mind and body deteriorate, I don’t have any interest in my 80’s. Diapers and pudding only cost so much.
Unlike some of the others who opined, I do not have any taxable investment accounts, only my SEP/IRA rollovers and old or current 401K/457 accounts. It might be worth 2 million by my age 62.
At 62, I will take my pension (worth about $25,000 a year), my social security (worth $24,000 a year), and tap into my retirement funds ($100,000 a year) for the rest. Notice the 5% draw down based on my estimated age of passing (age 82…or 85 if I set the all-time genetic record for my lineage).
The average person spends about 2-3 years partially or completely dependent on others due to old age and infirmity, so…if I’m lucky, I get to 75-80 intact. Few of the “top 5% for height” males I know have done it. I call it the “big dog syndrome”. It applies to dogs, elephants, apes, and many other mammals. Better to be about 5’6″ and 140# male than 6’4″ and 195, trust me on that one.
You should definitely take your personal survival risk curve into account; you should also, however, consider the surviving spousal benefits as well. In certain situations, it might make sense, even if you had foresight that you would die at 75, to delay for the benefit of your spouse.
YourHuckleberry,
You do have plenty of money for either decision. The $24k of social security will likely not be a make or break decision. You are a good example of the idea of using the money while you are younger as you might not get to use it later. Best of luck in outliving your ancestors.
Dr. Cory S. Fawcett
Prescription for Financial Success
“Better to be about 5’6″ and 140# male than 6’4″ and 195, trust me on that one.” For longevity perhaps, but for perpetuation of your genes, maybe not. Women like their men tall, want to look up into his eyes while wearing their heels during their wedding dance. As a 5′ 5″ male trust me on this. Of course this isn’t an absolute, if you’re wealthy/successful some women are willing to “overlook” the height thing.
The “As a 5′ 5″ male trust me on this.” comment was supposed to have a smiley at the end. 🙂
I have enjoyed being tall in a very big way (pun intended). I don’t know if it was a factor in my spouses attraction for me. I know I felt a bit weird dating anyone shorter than 5’4″ as I look like a giant next to them.
My grown daughters are 5’5″ and 5’9″. My wife is 5’6″. My 13 year old daughter is about 5’2″ but not fully grown and my 11 year old son looks gangly and I expect him to be tall.
My father was born in 1916. He was English, fought in WWII, and was 6’2″. A giant in his cohort. He was the tallest of the five males in his family. Four of the five died between 70 and 80 (two made it to age 80) and one died at age 66 of early onset Alzheimer’s that started at his age 58.
My mother (currently 78 and still working part-time) and her mother and grandmother live forever. They were all tiny at 5’0″ to 5’4″. My grandmother survived breast cancer at her age 85 and lived to age 95 in her own home, although by her own account, the last five years weren’t worth a poot as she was near blind with macular degeneration and had to stop driving at about age 85. She was “ready to go” for about four years and eventually put herself in hospice and passed away in her own bed singing Elvis tunes on her way out with her family at the bedside.
Good luck to us all. Live long and prosper, then die well.
My wife and I currently plan to take the benefits at 70. I’ve run the analysis from many angles and that makes the most sense for us. Of course we’re [early-retired] in our 40s so certainly something could happen that would change this. The most obvious factor would be some sort of health issue that lowered someone’s life expectancy.
Like every thing else in personal finance” it depends” and it is well” personal”. I was also surprised by Dr Fawcett’s recommendation. It is certainly the opposite of what I intend to do. I was planning to buy his book until I read this. Sorry. I think you do factor in general health and family history into the decision. In thinking about financial planning you think about the worst case scenario which is a long life (from a monetary viewpoint). If you die in a MVA at 65 before collecting so be it you paid for your cruises from your taxable account. What you absolutely do not want to happen is to be 90 years old and in a nursing home and you cannot fund the nicer place. The increased monthly SS check may not cover this but it will help. My father spent about 10 years is assisted living due to IDDM and macular degeneration. He had SS and a defined benefit inflation indexed government pension (military 20+ and civil service 20+) so his payment was no problem. Very few of reading this will have a defined benefit pension especially inflation indexed. My oldest brother is mid 70s retired from IBM and took SS at 62. He now regrets it. 2008 happened after he retired. I plan to take it at 70 unless I develop a health problem. I worry much less about funding cruises than what happens if I live to be 100.
Seriously? The better nursing home?
Once I am of no use and am not a contributor to my family, and become so infirm I cant manage my own checkbook, drive, and need an ECF…then not eating anymore (or falling overboard on a cruise…) start looking good.
Having been the medical director of a geriatric Psych unit as noted, I think there is a line where quality is so bad that one needs to consider opting out or at least being a DNR and not treating some medical issues anymore.
My maternal grandmother made this decision at age 90…but did not die until age 95. Her last couple of years were endured rather than lived.
My Dad was in assisted living and I have to qualms about this type of care. He stayed mentally sharp until 2 days before his death. Everybody’s genetics is different. I fear living to 100 so I plan accordingly.
Fair enough.
Not sure disagreeing with a person about one topic is a reason not to read their writing.
fair enough
Hatton1,
Just so you know, WCI and I agree on about 95% of things. There are a handful of points we disagree on and this is one of them. That’s what makes horse racing fun. There would never be any Pro/Con posts if we agreed on everything. A few years ago a colostomy was the automatic answer to an injured colon, and everyone agreed. Then someone started saying the opposite. Now we are fighting to get doctors to not automatically make the colostomy choice. Who knows where this social security question will be in the future.
I’m sure you will find something to disagree with in every author you read.
Best of luck to you,
Dr. Cory S. Fawcett
Prescription for Financial Success
My surgeon husband informs that colostomies are the new black.
I was just surprised by your ss argument. My oldest brother planned to do a similar start early and invest the difference. He admits he should have waited. For most of us on this blog it does not matter. I will have enough money no matter what I do but I do worry about people who marginally have a large enough nest egg.
Hatton1,
This pro/con blog was not about people who marginally have a large enough nest egg. It was about what to do if you don’t need the money. And like you said, it doesn’t matter for most of the readers on this blog.
Dr. Cory S. Fawcett
Prescription For Financial Success
Thank you, I learned a lot from this blog. I came up with 95 for my expected age on that calculator- and my biggest concern is outliving my money, especially since our income is mostly husband’s Army pension and VA benefits so I’ll drop to 1/3 of that if I survive him (calculator gave him 90 though). I’m also a Democrat near socialist 🙂 so I don’t mind if I never get my social security payments back- my grandmother got way more than she or my grandad ever put in, so it’ll be fair. I consider annuitizing some of our savings at some point in the future so I like the idea of SS being a lower cost good return annuity, even better value at 70 than at 62 (not total return, I know, but smaller cost at 70 compared to comparable commercial annuity available at those ages). I also learned the 50% of spouse maxes out at 67 so I’ll start that (expect that’ll be better than 100% my own, will have to see at the time) then, rather than at 70 anyway. As we get closer I’ll sort out the current laws to see if I (and he) can swap 50% his for 100% mine at 70 if that will be more (or maybe 50% his when I’m 62…).
I appreciate that I might never make it up but if I die before making it up, that’s better than wishing/ needing the extra that I’ve forgone in my 90s. ANd of course if I’m already on the verge of eating dogfood before 70 (or 67) I’ll reassess and start SS earlier.
I AM expecting that there might be income limits to the benefits, but hope this will be grandfathered in so either it’ll affect me before I start SS or won’t affect me no matter when it begins. In the Army I counseled a soldier departing to take the reduced pension (15 year buy out deal in the ’90s) rather than the lump sum. He refuted me with all the promises broken to soldiers in the past and I couldn’t argue against the lump sum any more given that track record known to him.
is not the break even point 16 years?
I read Dr Fawcett’s book and he shows the usual graph that people used to determine the break-even point, then makes the argument that people who have saved a lot of money should be using a different graph (which he also shows) that takes into account the benefit of leaving the retirement funds intact. I thought it was a pretty good argument though obviously people will have different takes on it.
Can you explain your comment that the lower earning spouse should take SS early? Seems to be contradicted by the rest of the post.
The goal is to get the high earner to delay as long as possible to maximize the survivor benefit. If the lower earner takes it early they are “hedging their longevity bet”. i.e. Whoever dies first the survivor gets the highest benefit. Therefore if one dies early and one does in their 90’s they made a good bet. They can get money early and keep a high benefit as long as one survives a long time.
The article references the simplest situation so we could focus on the 62 vs 70 issue. SS planning actually gets REALLY complicated (although less complicated than it was just a few years ago) when there is a spouse. Often it makes sense for the lower earning spouse to take it as soon as possible, then switch to 50% of the higher earner’s benefit at an older age. Mike Piper’s book is excellent on the topic.
Would you please clarify the actual rule involved in Eric’s question above? Specifically, if my spouse (the lower earning) takes her benefit at 62, does she ever have the opportunity to step up to 50% of my benefit (likely higher than her full benefit) if I delay? If she does, is that 50% of my full benefit (i.e., at age 67) regardless of waiting until 70, or the 50% of whatever my benefit is after waiting to take it(potentially until age 70)? I believe I understand correctly that on the assumption I die first, she does step up to 50% of my benefit if higher regardless, right?
On your specific question about lower-earning spouse filing at 62 she will be entitled to her own “reduced at 62” benefits until you file. Compare that amount to 50% of your own FRA (Full Retirement Amount). The maximum her spousal benefit can be will be that number. It will NOT increase if you delay till 70. That is why many spouses-working or not -file at their own FRA-to maximize the couple’s benefits. BUT if YOU delay till 70- to maximize your benefits that will be beneficial when one of you die. At that time only one benefit will remain-the higher benefit that you earned by delaying. There is no step-up per se, that is called the Survivor benefit.
Thank you for that clear and concise explanation!
This topic is a popular one with my physician clients. I think both of you are minimizing the likelihood that benefits will not be as promised. Perhaps they will be taxed at 100% of benefits (rather than 85% for most as is now the case)-this seems a certainty to me.
Perhaps they will be means tested-just like Medicare B premiums are now.
It seems hard to believe that the SS system will pay me as promised for up to four decades if I live a long life and have plenty of retirement assets. If there is any change to currently promised payments, then all the calculations in all the articles go out the window, and taking benefits earlier makes more sense.
If you are working past 62, then it makes sense to wait until Normal Retirement Age (66 and 4 months for me), but I’m taking my benefit right then. Steven Podnos MD CFP
I agree there is likely to be some change. But I wouldn’t call any particular change a certainty. I think you need to watch Congress in action more closely if you think you can predict what they will do!
I suspect changes will not nullify decisions as the changes are likely to be made in such a way that it affects those who took it at 62 or 70 equally. And if they happen before you get to 62, then the decision is still ahead of you, so no big deal.
It’s beyond me why you are willing to wait to FRA but not 70. The same logic that would lead one to not take it at 62 should apply to 66 1/3.
I don’t want to confound the argument, but I think I read about a reversibility option. If you took SS early and regret it a few years later, you could pay the money back and reverse the decision. I’m not sure if that is still true. I thought about doing that for my father. He took it early and I thought he shouldn’t have. He ended up passing away from Parkinson’s at age 76 so maybe he made the right choice in retrospect.
WealthyDoc,
Sorry about your dad. It is always easy to see if you did the right thing in retrospect. In retrospect, your dad did the right thing. Unfortunately we have to make the decisions in real time and guess as to the future. My future guess is different than WCI’s future guess. I like birds in my hand better than those in the bush.
Dr. Cory S. Fawcett
Prescription for Financial Success
I agree completely with Physicians Capital Management above. I will take SS early and invest it.
In the end, it’s simply a matter of philosophy and asset allocation. Money is fungible. This is just another investment. If you like annuities and want more, take SS later. If you don’t like annuities because you think you can do better on your own, take it later. Kitces has written about longevity insurance ( delayed annuity) and points out that most people will do better just investing the money on their own. Of course that’s going to be the case because you eliminate the middleman.
If you take it early and get a 7.4% return, you’ll be able to withdraw the money you gave up every year and die with the early withdrawal money intact. ( that’s not accounting for the COLA though). That’s not guaranteed, but remember, if you have to dig into that principal it’s ok, because if you took it as a higher benefit you wouldn’t have any principal at all.
I doubt that very many people reading this post are going to have any change in their lifestyle regardless of which decision they make.
IMPORTANT: IF YOU HAVE YOUNG CHILDREN TAKE SS EARLY:
Anyone who has children in their late 40’s or beyond should be aware that social security pays you extra money if you have children under the age of 18. You will get an extra 50% of your full retirement amount (FRA) up to the family maximum, which is varies between 170 to 175% of your FRA. For example, if you could collect 2700 a month at 66, but are entitled to 2000 at 62, your family maximum might be 2700 x 1.73 = 4671. You deduct the 2700 FRA from this, giving you 1971 extra potential dollars. If you have one child under 18 ( or 18 and still in high school ) you get 50% of the 2700, or an extra 1350 for that child. If you have a second child, you get the full extra $1,971, divided between the two children. Also, if the child is under 16, a stay at home spouse can also get up to 50% of the FRA. So with only one child, but a stay at home parent, you would still collect the full $1,971 extra. All additional children just share that same pot of money among themselves. Benefits to the parent are taxed, but are tax free to the child. Bottom line: If you have at least one young child at age 62, collecting SS early is a no-brainer.
This situation is not rare. I know two physician families taking advantage of this benefit.
Not sure I agree with this statement and doubt you do either:
I think you meant earlier. And yes, that’s Corey’s main argument- that he can invest the payments starting at 62 and come out ahead.
Yes, of course. Thanks for the correction.
Lots of nuances to SS. Anything out of the ordinary I would recommend the Larry Kolikoff book Get what yours. He has a some software too.
I liked that book. The original edition of that book publicized a clever way for couples to maximize their benefits. Unfortunately, congress read the book too and eliminated that particular trick. ( It’s not worth going into the details. ) But the scenario that I mentioned above, for retirees with young children, wasn’t mentioned in the book. Perhaps the software covered that, I don’t know.
AlexxT,
Thanks for adding another reason to take the money at 62. There are a lot of different situations out there and some of them will tip your decision one way or the other. Take all of your variables into consideration before pulling the trigger.
Dr. Cory S. Fawcett
Prescription for Financial Success
Did I miss reading about dual incomes and the pros/cons about who should take early (?) My (our) tentative plan was to one of us start early (lower payment) and the other delay to 70 to take the full payment. The caveat would be that I’m the lower earner (female) and potentially collect the lower payment longer…..But I also will get (assumed) federal pension around the same time. i think the ability for one to take earlier and one to delay will hedge the likelihood of the benefit vaporizing due to government unsustainability..at least someone is collecting something (we can only hope). Either way, we are absolutely by no means counting on any of this money….this is all “extra” to include my federal pension…which I think makes nothing really a wrong answer then.
That was deliberately left out of this post by both of us. Social Security planning can be complicated and we wanted to focus on just one issue- 62 vs 70.
It is quite likely that your plan is best for you and anyone else in a similar situation.
Bean1970,
Thanks for emphasizing the point that this is extra money. Either decision will be good and a bonus. If we don’t need the money, we really are discussing something that might not even matter. A true first world problem. The argument of how to have “more than enough” or more than “more than enough.”
I first read Dr. Fawcett’s opinion in his latest book (the red one on retirement). I didn’t necessarily agree with it, but it opened my mind to the possibility of taking SS early or on time under certain circumstances. If you’re an ASA 3 or 4 (i.e. unhealthy with multiple medical problems) and / or have a poor family history, then it makes good sense not to hold off until 70.
Personally, my grandparents and their relatives lived a long time, my parents are pretty healthy in their 70s and I hope to be in reasonably good shape when I hit 62, as well. I’ve got 20 years, so time will tell, but for me, waiting until 70 will make the most sense (that’s if the rules don’t change in two decades — a BIG if).
The spousal component is also key for me. My wife will likely get more by taking half of my benefit than claiming her own. If I wait until 70, she can start collecting half of my increased benefit at her Full Retirement Age (67). For her, waiting any longer has no upside, but the benefit of me delaying is magnified by her increased benefit, too.
Best,
-PoF
With recent changes to SS, my understanding is that the spouse does not benefit from your delayed retirement credits. The spousal benefit is limited to 1/2 of your full retirement benefit only. At 52 I am not worried about figuring this out yet. The calculus of this decision will likely change before we have to decide. I like the idea of longevity insurance. I also like the idea of using it as portfolio insurance if a bad sequence of returns happens. YMMV.
Well at 60.5 I am 18 months from a decision. I have read several books on the topic and discussed it with my brother who is 74. My brother also thought he could do better with investments and took it at 62. 2008 made this a poor decision. He regrets it. I am generally healthy and no history of Alzheimer’s in my family. I plan on 70. I also consider myself good with investments but the return on SS looks good to me.
Agree you should wait. Especially since you want to keep taxable income down while you work part-time since you may get that new pass-thru deduction. Lots of moving parts go into the decision for each of us.
Dr. Mom,
If you are still working, even part time, you should not take the social security yet. Wait until you retire.
Dr. Cory S. Fawcett
Prescription for Financial Success
I may be relying on out-of-date material or a faulty memory. At 42 with a 35-year old wife, it’s not a decision we need to face for a very long time, and the rules no doubt will change between now and then.
“using it as portfolio insurance if a bad sequence of returns happens.”
That’s my plan. I’ll start it anytime between 66.5 (FRA) and 70.5. When I’m feeling battered, deep into a bear market, and need a psychological boost.
Instead of 70.5 go for 70. (If you do 70.5 you leave 6 months of SS benefits on the table.)Common mistake-the 70.5 is when required minmum distributions start. Age 70 is when Social Security maxes.
I am 64, married 18 years and divorced 14. If I don’t remarry, I can draw 50% of my ex-husbands account starting at age 66 until I hit 70 and then take mine. This is by far the best deal for me. I suspect this is a big factor in seniors who decide not to remarry and just live together.
Is this strategy dependent upon him filing? When does he plan to file?
No. just has to be 62 or divorced 2 years. Otherwise some exes might delay out of spite…
The real argument seems to be about the “sequence of returns risk”. i.e. what if the stock market stumbles when you are age 62 and you start selling in a down market. Then you can go to Plan B and start Social Security early. A better way to do that is mentioned by Wade Pfau and to have a cash buffer that you draw down for 8 years. In this case that would be 8 years times $22416 or $179328. For someone with $2 million in assets that seems a small amount to set aside to maximize the Social Security “guarantee” (suspect as that is.) You can also set aside a smaller amount if you purchase a period certain annuity-which is what I have done. Conversely you can buy longevity insurance from the deferred account starting at age 80 and take Social Security early if you really distrust the government’s “promise”.
I think your point on sequence of returns is a great illustration of why this is a more situational decision than either author lets on. Personally, I’ve always planned to delay SS until 70 because this generally works out better when you run the numbers, especially if you plan to annuitize a portion of your nest egg like I do. But “generally” is a key word there. As a physician, I expect that I’ll be able to make a far more accurate life-expectancy forecast for myself and my wife when we’re sixty-two than what you might find in actuarial tables and certainly more informed than the general population data utilized by the SSA. Likewise, if the stock market has just tanked, I may go ahead and take SS (or take it at an intermediate stage if the market tanks when I’m 65 or 67) so I can leave more of my investment alone to recover. Saying you must take SS at a particular age is like rigidly adhering to a withdrawal percentage. When I look at my retirement “number,” I assume a 4% withdrawal and when I plan my draw-down phase I assume SS at 70, but I know the reality will probably be different as I make adjustments to reconcile health, life circumstances, actual (vs. projected) investment returns, family needs, and acts of Congress.
I like the idea of using the when to claim SS to combat sequences of returns risk. If risk shows up, claim earlier. If it doesn’t, claim later. But honestly, you should have a much better way to deal with SOR risk than this.
It would not be my first or only choice to address a sequence of return problem, but it’s one more tool for the tool box. I’m thinking of it the same way I think of the trach kit or the jet ventilator in the bottom drawer of the difficult airway cart — I’ll go for the bougie or the video laryngoscope first (and they’ll usually work), but I still want other options.
Fair enough.
This may influence your decision making
http://media.nmfn.com/tnetwork/lifespan/#13
there is an excellent book called “Get What’s Yours” that goes into all the scenarios of what married options are and how to msximize them.
Yes I have read it.
Someone is giving me money at 62. Who has seen tomorrow? Simple math.
Very complicated topic and I know what is right for someone may not be right for another (i.e. single person versus spouses with various incomes).
Assuming one already has “enough” for retirement and SS is additional spending/intvesting money, I do buy alot into Dr. Fawcett’s arguments and I have these thoughts:
-If you want additional “spending” money, it’s probably better spent in your 60s than in later decades. You will likely be healthier, more apt to travel, etc. Even if you’ve got great genes, never know when that next car accident may kill you are disable you. No one is guaranteed to make it into their 70s. Assuming I get to 62 and already have “enough”, I’d rather take the additional spending money today than wait close to a decade. Personal decision.
-If you want more to invest, I think it depends on what you’re investing for. Sure, if you invest early SS for yourself, who knows what the short term may bring (it may be better or worse than the gov’ts guaranteed 8% per year by the time you reach 70). However, if you are planning to invest it for legacy purposes and want to leave money to kids/grandkids, then that money you are investing at 62 may well be in the market another 30+ years, and if it doesnt come out ahead of 8%, I bet it would be close. At least claiming the money early locks it in to your families inheritance…f you die at 69, that 8% you were “earning” stays with the gov’t and your family doesnt see it.
I think that’s a crummy argument. You can spend more in your 60s either way. You don’t need to take Social Security early to spend more. You can spend more out of your portfolio knowing you have more SS coming. But yes, if you die at 69, you’ll come out ahead claiming early.
Not only 69, but 75, 80, 85. There is a breakeven point eventually, but as Dr. Fawcett pointed out, the actuarial chances of making to that age are not in ones favor. The investing argument I still feel has more appeal for early SS, IN THE EVENT that one has long term investing/legacy in mind.
-The longer you stretch out the investment the more realistic 8% returns with money invested between 62-70 will be.
-The lack of “locked in” returns (by waiting during your 60s), I believe, is very significant. Sure, your potential payment is growing, but nothing is in your account yet.
To me, the benefit of having a little more if I happen to outlive my expected lifespan is not worth the chance of the govt keeping all of my returns should I die early.
New Guy,
You make a good point that illustrates how each person will give each point a different weight in the decision. We each have things we feel are more important. And each of us weight the points differently. Weighing a point differently may swing the answer the other direction.
Dr. Cory S. Fawcett
Prescription for Financial Success
i am firmly on the wait till 70 side.
The only semi-convincing argument I’ve heard is the risk that congress will find a way to means test you out of your SS. (ie if you have more than 2M in assets, Uncle Sam will now impose a massive surtax on your SS benefit)
This would have to be imposed however between when you turn 62 and 70, or you’d have to the rare individual who is not even spending enough in retirement to prevent continued savings accumulation (sadly likely many of the supersavers on this site)
I’ll still take my chances that I can estate plan around any means testing Congress throws at me.
A middle ground plan seems reasonable to me. Plan on age 70, but if equity markets crash somewhere between age 62 and 70, claim right away. After the crash, expected returns should be higher and you don’t want to deplete the portfolio while it is down. If one does claim at pre FRA in such a scenario, I think one has the option to suspend SS payments from FRA to age 70 to get the delayed retirement credits. One could have it a bit of both ways if the timing works out.
As others have commented, there is a mathematical versus longevity consideration for taking SS later. Sure, statistically you ought to make it to 80. But you can’t take your money to the grave either. Your spouse will stand to benefit from your SS if you’re not around to enjoy it, just like WL.
I hope that by the time doctors get to SS withdrawal age, their families ought to be well taken care of already so the numbers may not necessarily change the outcome. Perhaps your nest egg is nicely structured so that you live more off of your SS whenever you become eligible so that your heirs invoke the step-up basis out of your taxable accounts when the time comes.
One other thing not considered: the taxation of SS benefits. You can’t just look at the gross benefit, you have to look at the net benefit after taxation. If delaying allows you to tax plan better so that after you start getting benefits almost all the taxable income you have are those benefits, then you can keep it nearly tax free.
There are calculators out there that determine NPV, taking in projected survival probability curves, as well as effect on spousal benefits (which really can’t be ignored).
http://www.bedrockcapital.com/ssanalyze/
https://www.dropbox.com/s/htp4az52rtf4qto/Survival%20Weighted%20SS-%20Single.xlsx?dl=0
Good point. More years for Roth conversions and similar techniques.