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!
Dr. Fawcett’s math seems to be a bit off, if 6% is nominal, then benefit at 70 needs to be escalated for 8 years of inflation vs. benefits at 62. If 6% is real, no escalation is required, but I would hardly call that a “minimal risk” investment, a more appropriate real rate would be around 3%, in which case the break even age is around 83, not 90.
Alan,
The math is not off. You are just wanting to add other assumptions to the equation. The math is simple interest. You can add factors for inflation, you can add factors for taxes, and I’m sure there are other factors you could put into the equation. We were trying to limit the variables to make the discussion simple.
Dr. Cory S. Fawcett
Prescription for Financial Success
As has been mentioned by some, I think this is a situation-specific decision. As my spouse and I are both recent military retirees with near six-figure pensions each, plus a decent nest egg, there’s no real reason to wait until age 70. We will just both take SS early and invest/spend it as desired knowing that our pensions/nest egg cover not only our necessities but many wants as well (even one pension will cover necessities +).
Mark,
Great job, you and your wife have won the money game. You will be in good shape no matter what you do. My goal is to help more doctors reach that level of financial success.
Thank you both for your service to our country!
Dr. Cory S. Fawcett
Prescription for Financial Success
Very basic question: can one decide to start SS payments at any age after 62? The post made it sound like it had to be 62 or 70. I could see some instances where you delayed payments at 62 and then something happens that makes you want to start before 70 (ie cancer diagnosis, market crash, etc) and you change your mind.
Yes, any time between 62 and 70. The post didn’t try to cover every possible detail about Social Security but instead focus on one decision- take it as soon as possible or as late as possible, the usual choices people make.
Amazing minds. I wrote a post a few weeks ago arguing that folks should delay until Age 70, using many of the same arguments you make in this excellent post.
I’m in your camp on this one.
“Using a 6% return, a figure that is reasonable to earn with long-term investing and minimal risk.”
I think that statement is where you go wrong Cory. To earn that type of return you would have to have a significant portion of your asset allocation in stocks, and stocks can go down or sideways for a decade or more. So you are basically advising seniors to gamble with their retirement funds. No thank you.
White.Beard.Doc,
No I’m not advising seniors to gamble with their retirement funds. Over a 30 year period, they should be able to easily and safely get a 6% return. We should try and avoid equating our long term returns with what is happening in today’s market. Just as we don’t want last years stellar stock market returns to be what we project from, we don’t want to use the current ultra low interest rates either since they will not be staying this low. Interest rates will go back up, they move up and down just like the stock market returns do. I’m not happy with today’s ultra low interest rates but they will recover eventually. At least I sure hope they do. There is a long track record to look to as an example.
Best of luck,
Dr. Cory S. Fawcett
Prescription for Financial Success
I am in the highest federal marginal bracket and my state taxes are very high as well. A conservative asset allocation includes lots of bonds, and who knows or can safely predict whether bond yields will go up all that much in the future. I am currently earning a pittance on tax free municipal bonds, between 3 and 4%, but they are reasonably safe.
You haven’t convinced me to take SS before age 70.
White.Beard.Doc,
Congratulations on being in the highest tax bracket. I wish everyone was so fortunate to make that good of an income. You look like you are doing well with your bonds in the current market, keep up the good work.
I’m not trying to convince you to take your SS at 62, I was presenting some reasons to consider doing so. After weighing the issues on both sides, you will often come up with the answer that will best suit your situation. If people don’t hear the other side of the argument, they really aren’t making an informed decision, they are just lemmings following the one in front.
Reading a Pro/Con blog will give you food for thought on both sides of the issue. Like getting a PARQ before surgery.
Thanks for your comments,
Dr. Cory S. Fawcett
Prescription for Financial Success
Certainly if you expect low returns or are investing conservatively (i.e. lots of bonds) you are much better off delaying SS than taking the money and investing it.
To beat a 8% return you are talking about investing the money in stocks.
I love this pro/con. The lifespan calculator predicts me at 91. I am 50 , That’s a long time! And I do like cruises, Would like to retire at 58 with 3-4 million nest egg. Sadly no pension. I will run these numbers a lot in the future. Thank you.
AVOOB,
Glad you liked it. I hope lots of docs will be thinking about this question and come up with the answer that will allow them to sleep well.
Dr. Cory S. Fawcett
Prescription for Financial Success
Knowns:
You will die.
You will need money until you do.
Someone might need money after you do.
Unknowns:
When you will die.
How healthy you will be until then.
What the markets will do.
What Congress will do.
The closer you get to the end, the clearer all these items become. Planning for the worst and hoping for the best has been good advice in life, investing, and surgery.
The main dilemma seems to be figuring out how close you are to the “Alpo” end or the “Alfa Romeo” end of the retirement spectrum, and then your relative ability to predict the markets versus predicting Congress. With a decent nest-egg, reasonable lifespan estimation, and known expenses, the question becomes do you think the market or Congress is more likely to make things swoon in a short time period? I’m no Bernstein (meaning that I am far from a market guru), but I am probably more concerned about the devastation that could be wrought by a pen stroke than a bear market over a crucial 5 year span. Markets should correct after that and my lifespan should proportionally decrease.
If I take the money early, I may be wrong, but I’m not crazy. If I pass up on the early money and Congress turns me into a liar, I am an all-day sucker. Assuming that neither dramatically affects your lifestyle (and I believe that was the condition of the pro/con), how would you feel managing the downside risk of each case?
Surgery has taught me to make decisions based upon the complications, not the successes.
GRIZZLE,
You bring up good points to ponder. Thanks for your input.
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 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.
Jenn,
I’m so glad you found this helpful. You took the time to look over the best answer for you. That is exactly what this was all about.
Best of luck,
Dr. Cory S. Fawcett
Prescription for Financial Success
Interesting post. Both the pros and cons would have been helped with more detailed numerical analysis, but interesting ideas nonetheless. Hard to tell who is right or if the debate is even worth having without using actual numbers. Without doing any math of my own, I have a feeling the outcomes are not that different between taking SS at 62 vs 70 in this case. If this $2M doc most likely dies with $1M in one scenario and $1.05M in the other, maybe it’s not worth fretting about either way.
That’s probably true. The more other resources you have, the less important SS is to you.
The payback and re-retire option was eliminated in 2010. Too bad because you could make a lot of money on that strategy.
I’m taking at 70.
What is missing in the analysis is how much money you are going to live on. When I FIREcalc’d $2,000,000 at a $80,000 (4%) withdrawal rate and 30 years (age 92) time horizon there was a 94% success rate. Add $22,500 and you’re at $102,500 income. If you wait and retire at 70, ss = $42500 you only need $60,000 from your 2mil nest egg to get $102,500 with zero failure a 40 year time horizon, and you pay lower taxes (assuming married jointly) since you pay on only 85% of SS. Taxes on age 70 is $7962, while taxes on 62 are $8634 assuming standard deduction and a 12% bracket.
There is a bad thing that happens if a spouse dies. If your spouse is taking half of your age 62 $22,500 SS her income will drop by $11,250. Her income will drop to $91,250 BUT her tax bill goes to $13022 ($78228 net)) So now your spouse is making less money paying higher taxes with a portfolio with only a 94% chance of lasting 30 years.
Age 70 spouse will be making $75000 with a tax bill of $8952 ($66,048 net) so widow 70 needs to pull another $12180 out of the 2mil to equal widow 62 ‘s income. If you do that and adjust to a 30 year horizon your 2 mil has a 99% chance of success.
Personally I don’t look at SS as “gravy” or “take a trip” money. I look at it as an annuity which protects and prolongs the value of my portfolio and acts as a damper against SORR. Notice the difference in portfolio longevity in the above example that 5% improvement is due to SS protection. SS will keep sending you a check regardless of your SORR. My personal portfolio survives regardless of SS but it is very much part of my analysis
Good point about paying taxes as a single.
Personally I think when you you come across a subject such as this where both sides have equal arguments, but also risks, your best bet is the middle of the road FRA. At full retirement age this is a good compromise from being “too greedy” or “too conservative.”
Also with people living longer it is never a given that you won’t get married later on in life for the single person. If you take the age 62 benefit you have limited your income in the area of spousal benfits.
This new article comes down on Cory’s side of the argument.
https://www.msn.com/en-us/money/retirement/why-it-might-be-better-to-take-social-security-at-age-66-instead-of-70/ar-BBIBtFX?li=BBmkt5R&ocid=spartandhp
I think there are a couple things that author misses, or doesn’t understand. In the first place take a look at how hard it was for our Congress to pass a law that gave a tax break to most of the country. Do you really believe that could pass something that would REDUCE our Social Security payments – even tax that last 15% we are getting tax-free. I just don’t see it happening. Not saying it’s impossible but it is nothing to bet your retirement on. Personally, I am taking SS at 66 because the math for us works out better.
Secondly, by all accounts the national debt is not spinning out of control, the increase in debt is actually slowing and I personally believe this slowing will continue as more and more boomers spend down their IRAs or convert that money to a Roth in “fear” of looming taxes. Here is an article that explains the math of it all:
https://seekingalpha.com/article/4140837-risk-roth-ira-revolution
Dave
I don’t see why it would ever be right at 66. If 62 isn’t right, then 70 would be and vice versa.
WCI,
It can actually be right at any age depending upon your own situation – other income streams (losses or increases to them), your own longevity estimates, and whether you are the spouse with the lower PIA or larger PIA and by how much.
One particular reason why the age 66 is important for a married couple (if 66 is your FRA) is because the spousal benefit does not increase past the FRA, so if that comes into the equation because you are a much lower earner spouse then there is absolutely no reason for you to be taking SS beyond your FRA, as there is no benefit to you.
Right- the personal factors can affect your decision, such as if you haven’t started it and are diagnosed with pancreatic CA at 65. I meant more from a theoretical basis with regards to this argument. If waiting until 66 is good, then waiting until 70 is better. And of course once you throw a spouse in it gets more complicated.
For $40 you can go to Lawrence Kotlikoff’s Social Security software and run your personal situation. It is easily worth the price. http://WWW.maximizimysocialsecurity.com. It is really justified for complicated situations and when you want to play around with your expected death ages.
Dr. Fawcett and Dr. Dahle are both right and wrong. When you take social security is dependent on many things. Here are just a few:
1) Yours and your spouse’s ages – Your retirement plan will be different if your spouse is 10 years younger than you, the same age as you, or ten years older.
2) Yours and your spouse’s longevity family history.
3) Do you want to leave money for your kids? If you take SS early at 62, you will have depleted your 401K/IRA less if you die before the breakeven age when taking SS at 67 or 70. Basically, taking SS early can allow more money for your beneficiaries.
4) When you take your pension – Many pensions allow you to quit work at 60 and start taking payments right at 60 or any month from when you quit work until age 65, for example. The longer you wait the higher the benefit just like social security.
My recommendation is to develop your own spreadsheet that includes your 401Ks, IRAs, social security, pensions, etc. and see for yourself what works best for you. You’ll need to determine how much you will need in retirement that has some unknowns like healthcare coverage. You will need to decide how much margin you want for your retirement needs estimate. Here are some tips:
1) If you are 50 years old and you want to retire and collect social security at age 62, your benefit statement from the SS is wrong and can be off by 20%. The statement does not factor in salary growth (doesn’t matter much for us because we exceed the maximum earnings), maximum earnings growth, index factor escalation, and bend point escalation. It’s best to learn how SS is calculated. If this is too intimidating, you can try a generic SS escalation. For example, if you are 50 and want to estimate your SS benefit if you retire at age 62, multiply the SS provided age 62 benefit by 1.015 ^(benefit age – minus your age). For example, if SS says your benefit at age 62 is $2,000 per month, $2,000 x 1.015 (62-50) = $2,391 per month or $28,695 per year. If you want to quit work at 58 and collect at age 63, you’ll need to implement the SS equations in your spreadsheet.
2) Decide if you want a go/no-go estimate or an income maximization estimate. A go/no-go estimate simply answers do I have enough for retirement based on my retirement income needs estimate. This is similar to what many financial advisors will give you. An income maximization estimate tells you how much you can withdrawal per year through your termination age. This lets you know how much margin you have to your needs.
3) An income maximization estimate is usually based on escalating your income by inflation (3%) every year so you have the same buying power. Another option is to only assume that you are going to escalate your retirement income by half of inflation (1.5%). This allows you to withdrawal more money when you are younger and more active and taper down to what you need at your termination age. You’re probably not going to be walking 20 miles a day around Epcot when you’re 85, but you might at age 62.
4) To determine what works best for you, you’ll have to grind out calculations for each of your options: your work termination year options, your spouses work termination year options, when you take your SS benefit, when your spouse takes their SS benefit, when you take your pension, when your spouse takes their pension, etc. Just three variables (your SS benefit age, spouses, SS benefit age, and when to take your pension) results in a three dimensional matrix of estimates. Guess what, this all changes based on pre-retirement inflation, stock market growth, etc. In 2016, my optimum plan was for me to quit work at 62, take SS immediately, spouse takes SS at age 67, and collect my pension at age 63. The stock market growth last year changed the optimum dates.
5) Do you want to work part time for a few years before you retire? This seems tempting, but do a thorough evaluation before you do this. As a financial example, lets say you have two options: work part time at age 60, part time at age 61 and retire and collect benefits when you turn 62 or work full time at age 60, quit work at age 61 and collect benefits at age 62. Two half years equals one full year so what’s the difference? When you work part time, you may be under the SS maximum earnings so you will pay more SS tax in two half years than one full year. Also, the two half years under the maximum earnings likely will not increase your SS benefit – thanks for your donation. When working two part time years, you lose investment growth because the second part time year’s investments only have one year to grow. These are just two things to consider, there are more.
There is no one answer fits all. You may read about things to consider in your evaluation. Ultimately, you’ll have to take control of your own future.
WCI, I agreed with you until this was discussed at seekingalpha.com. You’ll need an account there, but it’s free.
In the linked article, a CFA uses 3 arguments to explain why filing early may be the better idea:
In summary,
1) The cost of living adjustments that raise social security payments are flawed and personal inflation for retirees is almost always higher than the “CPI-W” that social security uses. The CPI-W looks at inflation for workers, not retirees, so it’s not the best measure to use anyway. Bottom line is that current benefits are worth more than future benefits because real inflation will outpace the COLA adjustments.
2) The “hold harmless” clause of social security means that your Medicare Part B premium can’t go up by more than the increase of your social security payment. It only applies if you are receiving social security, so it’s relevant for those aged 65-70. And, it only applies to those who make <$170,000/year, so may not matter to some/many retired doctors. Essentially, if your Medicare premium isn't subtracted from your Social Security check, you get the pleasure of paying much higher increases in Medicare premiums (up to $428/month for 2018) while those protected by hold harmless still get to pay $134/month. Hello, means testing.
3) The trust fund will run low in the late 2020's or early 2030's, and there is no guarantee or promise behind the estimated benefits. The argument is that they can't take away what you've already been paid starting at age 62, but they can lower everyone's future checks when the trust fund runs down. You can likely predict that they will expect those who planned well and were successful to "pay their fair share", and that lower income retirees will again be "held harmless". Hello again, means testing.
Lots of food for thought. I might file at age 62, after all!
https://seekingalpha.com/article/4143078-using-personal-math-instead-abstract-theory-make-better-retirement-decisions
1 is an irrelevant argument.
2 Interesting. Not sure it overcomes the main effect of waiting though (more guaranteed income)
3 I don’t buy that argument. Name 10 senators willing to vote to reduce/eliminate SS in any significant way. Go ahead. I’ll wait. It’s already means tested. Might it become more means tested? Sure. But I don’t think this is a particularly strong argument.
It really comes down to whether you’re willing to take the risk to invest to beat a guaranteed ~ 6% return. I’m not. If I had a 6% debt, I’d pay it off rather than invest.
Think SS will be around in 30 years when I’ll turn 70?
Yes, in some form.
My situation is probably outside of the parameters used for the basic arguments presented (i.e younger spouse who will likely have substantially higher social security).
Having studied and read widely on this topic I had planned to hold off until 70; however, several points have me questioning if I should begin SS early/earlier:
1. If I spend from my portfolio for eight years and then pass away around 70, my spouse will have lost the money spent AND never benefit from my social security. Not willing to ignore this just because it is a lower probability event.
2. We plan to relocate from a high income tax state to a no income tax state when I reach about 70. So SS payments from 62 to 70 would not incur state taxation, but IRA/401k withdrawal would (for the sate in which I reside now). Due to my spouse’s income this would coincide with high tax rates.
3. I am concerned about the potential future reductions in SS payments due to the current projected funding shortfall.
4. Preserving/ growing my Roth Accounts would be favorable for my spouse who would be pushed into higher tax brackets as a single filer once I pass away.
Guess I still have a lot to consider and analyze . . .
I ran some simulations. Here are my assumptions:
Social Security at age 62 is $22,416 and at age 70 is $42,132
Social security increase per year = 1.5%
Retire at age 62
$2,000,000 pretax 401k value at age 62
3% inflation
Here are my results:
3% investment growth
2018 pre-tax Age when 401K Age when 62 SS Age when 70 SS
Income @70 > @62 401K < 0 401K @62 401K < 0 401K @62 401K < 0 401K @62 401K < 0 401K < 0
$60,000 77 none none
$70,000 77 none none
$80,000 77 none none
$90,000 77 none none
$100,000 77 none none
$110,000 77 96 100
$120,000 77 81 94
$130,000 77 87 89
From the analyses, the break even point for a 401K balance between collecting SS at age 62 vs 70 is between age 75-77 depending on the 401K rate of return. If you die prior to age ~76, you will pass on more money to your heirs. You also need to consider your family longevity, estimate how long you will live, and how aggressive of a 401K portfolio you want (or can live with). After your 401K balance is zero, you will only collect your social security.
Mike Piper made a strong case for taking SS at 70 at the conference. You need pretty high returns for taking it early and investing it to come out ahead. Over 6% real. And that’s without risk adjustment.
It looks like the formatting changed on my analysis results:
The data is in four columns
(2018 pre-tax income) (Age when 401K @70>@62) (Age when 62 SS 401K<0) (Age when 70 SS 401K<0)
3% investment growth
$60,000 75 none none
$70,000 75 100 none
$80,000 75 95 99
$90,000 75 90 94
$100,000 75 87 89
$110,000 75 85 86
$120,000 75 82 84
$130,000 75 81 81
4% investment growth
$60,000 75 none none
$70,000 75 none none
$80,000 75 none none
$90,000 75 95 99
$100,000 75 90 93
$110,000 75 87 89
$120,000 75 84 86
$130,000 75 82 83
5% investment growth
$60,000 76 none none
$70,000 76 none none
$80,000 76 none none
$90,000 76 none none
$100,000 76 94 98
$110,000 76 91 93
$120,000 76 86 88
$130,000 76 84 86
6% investment growth
$60,000 77 none none
$70,000 77 none none
$80,000 77 none none
$90,000 77 none none
$100,000 77 none none
$110,000 77 96 100
$120,000 77 81 94
$130,000 77 87 89
I don’t know what Mike Piper said at the conference, but here is a recording when Mike was on a radio show, America Talks Money, where he discusses many aspects of social security and when its best to take it.
http://www.americatalksmoney.com/episode-19-social-security-made-simple-with-mike-piper/
Here is a link to Mike’s blog where he discusses when to take social security from his book:
https://obliviousinvestor.com/social-security-benefits-single/
In Mike’s blog, he states the breakeven point is age 80.5. He also states that the Social Security Admin life expectancy age is 82 for males and 84.8 for females. (Newest SS numbers are 84.3 for males and 86.6 for females.) However, for this analysis, Mike assumes that all of the SS money is invested with a rate of return the same as inflation (~2% based on back calculations and 0% SS increase per year). The 80.5 age is when the total value of each investment is the same. Using Mikes’s example, you need a 7.5% return to ensure that taking SS at 62 provides more total return than taking SS at 70 until the age of 100.
I just realized that my previous simulation choked when I nested the simulation loops. Ignore the previous values. I ran each case individually and here are the break even ages versus rate of return (no reduction for inflation):
This assumes that your 401K principal supports your yearly withdrawal.
0% increase in SS per year
(Rate of return), (break even age)
2%, 81
2.5%, 82
3%, 83
4%, 84
5%, 87
6%, 90
1% increase in SS per year
(Rate of return), (break even age)
2%, 82
2.5%, 83
3%, 84
4%, 86
5%, 88
6%, 92
Remember you have to risk-adjust the returns. The return on delaying SS is guaranteed. So you should be comparing to TIPS yields (under 1% real right now) not what you might get in stocks or real estate.
WCI,
I understand your implications of risk adjusted returns, but the other side of that story is you can’t eat risk adjusted returns, and there certainly is nothing like a guarantee from SS by waiting. It won’t matter to most, but their heirs would the ones on the short end of the finances if you spent down your retirement savings while waiting to age 70 to claim SS and you then died at age 71. Furthermore by spending down your savings, if it is of modest size, you severly limit your “lump sum” capability should a sudden medical (or other) situation arise.
My only point is there is no guarantee on either side of the equation as we can’t predict when we will die. Take it early or take it late is a crap shoot at best, for which you can only make your best judgement. For me the middle plan (age 66) is a happy medium.
It’s your money and you get to make your own decision. Most people don’t delay until 70 simply because they need the money. But it’s pretty dumb to NOT delay to 70 (assuming you’re healthy) AND to invest in bonds or buy a SPIA. Delaying SS is your best “guaranteed” investment.
Thinking of Social Security as fixed income as opposed to “what could I earn if I invested it in the stock market” makes it more clear. Instead of owning more bonds you can substitute more Social Security income and and own more equities.
This is a really good discussion.
WCI, I understand your point that the SS benefit is guaranteed to increase; however, your investment growth is not. I understand your thoughts on TIPS for risk avoidance.
Our original assumptions were you have a $2,000,000 401K and neither SS benefit at age 62 or 70 is enough retirement income so you have to take money from your 401K. In this example, you are not investing your SS benefit, you are taking less out of your 401K. How are you minimizing risk in your 401K?
I’m not quite getting what you are referring to. If you take your SS benefit late, you’re spending other funds early. If you take SS early, you leave the other funds invested.
In our example, the Social Security benefit at age 62 is $22,416 and at age 70 is $42,132. With either option, you will still need to take money from the $2,000,000 401K for your retirement income.
For example, if I take my SS benefit at age 62 and I need $80,000 per year of retirement income, I’m not going to withdrawal $80,000 from my 401K and invest my SS benefit in a TIPS. I’m going to withdrawal $57,584 ($80,000 – $22,416) from my 401K. So, from your previous reply stating that the choice of taking your SS benefit at age 62 versus 70, should be based on using a TIPS yield of ~1% may not apply to the original example because you are always pulling money from a 401K.
I don’t think you’re getting what I’m saying. Those who advocate taking SS early to invest it or leave their money invested need to realize that what they should be comparing delaying SS to is investing in TIPS because they have similar risk levels. The return on delaying SS is way better than the return on TIPS, so delaying SS is the right move. Hope that helps.
WCI,
I would agree with you except for the fact (that I think was mentioned earlier) that when you take SS early, this has increased your income by say $22,000 of absolutely guaranteed fixed income. That guaranteed income is now at the top of the pyramid of my spendable income in retirement to cover my needs. That means I can offset that $22k that I don’t need to withdraw from my IRA from now until I die and put that way out on the risk curve of 100% equities, which will by all historical measures do better than 8% over the 30+ years it may be invested.
Does that make sense?
Now the above does not address what happens after age 70, when if you delayed you would have more guaranteed income, but even without the extra invested risk that you could take, the breakeven point is still not until age 80+, so it is not a no “brainer” unless you know how to calculate the risk of an early death.
My point was however that nothing about taking SS early should make you think you need to take on more fixed income in your portfolio because of it – ala compare it to investing in TIPS.
In my opinion the only reason to take SS early is to spend it and in doing so it lessens the risk of your overall portfolio by adding that amount of fixed income, which would allow you to “dial-up” the risk slightly on the rest of your portfolio to maintain the same risk level that you are comfortable with.
If you delay SS, then those are the years you need to “dial-down” the risk to avoid spending your portfolio in a down market. In fact in the 4 years I delayed to age 66, the proper action for me was to put that 4 years of income in cash and spend that down until SS kicked in. That is the proper way (IMHO) to think about leveling the risk. When you do that calculation you will see it is not a “no-brainer” to delay.
Dave
I disagree that the way you view this is the proper way to think about leveling the risk. I side with Mike Piper on this argument.
If your goal is to convince me, I’m not sure we need to continue this engagement. If you’re worried you may not be looking at this the right way and want me to explain in a different way why I think you’re wrong, I’m willing to do that.
Let me know.
Since you could get $22416 at age 62 you could put ($22416*8 years=$179000) (8 is age 62-69)
$179000 into cash/CD’s or period certain annuity to mirror SS. So only 9% of the 401k ($179000/$2000000) used to “buy” a larger SS payment for life.
I admit I misread the scattered assumptions. I think all of the assumptions should have been consolidated along with the goals.
The title of this blog is When to Take Social Security – A Pro/Con. As mentioned, this is a pretty heavily debated topic. In my opinion, the example used is possibly the worst example to try and determine the when to take social security. Why? Because of these statements:
“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.”
“We’re talking about someone with the means to do either without any significant hardship (see assumptions above) like most readers of this site.”
“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.”
These statements indicate that the Social Security benefit is not needed and thus what to do becomes more of an opinion. This also assumes that all desired retirement activities and expenses are covered by the nest egg along with margin for future unknowns. These statements should have been part of the ground rules and maybe the title of the blog could have been different.
Dr. Fawcett’s opinion is that have more fun with the extra money while you are younger and can enjoy it, or you can invest the money. Depending on your return on investment, you can do better or worse than taking SS @ 70.
Dr Dahle states, “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.”
Again two different goals/options with what you can do with the unneeded bonus money.
Let’s examine Dr. Dahle’s longevity insurance use. Since the required income in retirement was not in the ground rules, let’s assume a retirement income of $65,000 in 2018 dollars and the person is retiring in 2018. No EOF life figure was given, so lets assume at age 101 the person runs out of money from their nest egg (actually they’ll run out of money at age 98 but I’m rounding to 100 for simplicity). Assuming 3% inflation, $65,000 scales to ~$206,000 at age 101. Taking SS @70 and assuming 1% SS benefit increase per year and a 1% growth from your TIPS type investment in your SS investment account, results in a value of ~$1,687,000 and a yearly SS benefit of ~$57,000 at age 101. Using the 4% rule applied to the SS investment account, you will have ~$125,000 of total income at age 101 when you need ~$206,000. If you take SS @ 62 you will have a total income of ~$82,000. It looks like neither option provides complete longevity annuity insurance when you run out of money.
However, if you take your SS at 62 and use it to reduce the amount you withdrawal from your 401K each year, instead of running out of money at age 101 you’ve now extended your 401K to age 112. Similarly, taking SS at 70 extends your 401K to age 121. This assumes an average 401K rate of return in retirement of 4% and a 1% yearly increase in the SS benefit.
Also, if you take your SS benefit at 62 and use it as fun money until age 70 and then use the SS money to reduce your 401K yearly withdrawals, you extend your 401K until age 107. Similarly, taking SS at 70 and taking extra out of the equivalent of the age 62 SS benefit until age 70 results in a 401K extension to age 112. For these two cases the breakeven on the 401K balance is age 85.
What everyone here is forgeting about is the REAL world where we don’t get 4% returns from our 401k, and our tax rate is not zero on the 401k money withdrawn.
I ran a few cases from Jim Otar’s retirement calculator, that includes real inflation statistics and real returns and made an allowance for taxes. Chose a $48k budget, against an age 66 PIA made up of $24k SS and $24k inflation adjusted annuity. Taxes and the make-up for the SS delay was pulled from a traditional 401k with a $200k starting balance with asset allocation of 50/50.
As you might expect, if you live past your longevity projection, the person who delays will begin to move ahead, but for the person who delays to age 70, they will run out of money in the 401k by age 68-69, in a number of real world return sequences. For one reason the delayer has to pull extra money out to cover about $1000 more in taxes every year to age 70, based on 2018 tax brackets. The delayer can weather the zero balance 401k by taking out a small loan until their larger $31,680 SS payment kicks in.
Of course for the individual with the larger budget, taxes are a bigger chunk of this picture and more income is needed.
The delayer can also just take SS when he runs out of money.
FinancialDave,
Good point. I was assuming a $2,000,000 401K all pretax for simplicity. For this analysis, I didn’t factor in that the 401K withdrawals will be 100% taxed and the SS benefit may only be taxed up to 85%. I also didn’t factor in RMDs and any conversion of pre-tax to Roth strategies.
In my personal retirement spreadsheet, i put in Trump’s new taxes with the appropriate taxes applied to SS benefits through the years. For my own stuff, I look at income after taxes.
Many financial advisors assume 4-6% of growth (not factoring in inflation) in retirement which includes some risk. To balance risk, the portfolio is diversified to allow cash/bond withdrawals during market drops and allow the higher risks funds to recover. Then, re-balance the portfolio as needed to maintain “optimal” ratios. I recently looked at annuities on-line, and when you work backwards for the few I looked, each at assumed a 5.8% return with the annuity seller not making any money. So, the annuity seller was assuming a rate of return over 5.8%.
In the area of annuities, the insurance companies cover these with bonds, so their return is probably around 3%. If you do an IRR calculation on your investment into an annuity I think you will see it is in that area as well since most of the money being returned to you is your own investment, especially in the early years. The XIRR function in excel is a great little tool, though it has been a couple years since I used it on annuities.