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.
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.
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.
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.
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!