Take Social Security now or later? Answer not so simple

March 28, 2011

Executive assistant Mario Rebellato, 68, looks at a staff availability chart as he helps field calls at Pimlico Plumbers in London July 29, 2010.  REUTERS/Suzanne Plunkett It’s a no brainer that your retirement will be better funded if you delay it. Work longer, and you (1) earn more money; (2) reduce the number of retirement years you have to cover;¬†and (3) boost your Social Security benefits doubly, by delaying them (unclaimed, they’ll grow roughly 7.25 percent a year), and by adding new earnings to the formula by which they are calculated.

But here’s a question that’s far tougher: What if you can’t work longer, because you lost your job when you were 59 or 60? Should you start taking Social Security as early as possible (when you are 62) or defer it as long as you can?

That’s not a theoretical question. Almost half of current retirees were forced to retire before they were ready, according to new findings from the Employee Benefit Research Institute. Many of them are drawing down their family savings and waiting for their 62nd birthday, when they can begin taking Social Security benefits. But would they be better off continuing to tap their family savings while deferring their benefit longer?

Here’s the basic math: A retiree who starts benefits at 62 will get a benefit that is roughly 25 percent smaller than their full retirement benefit benefit. Those starting benefits will increase every year that they are deferred. A woman who expects a $1,000 monthly benefit at age 66 would be able to start at 62 with a $750 monthly benefit. Alternatively, she could wait until she turns 70 and get $1,320 a month. Whatever benefit she starts with would be adjusted annually for inflation.

The conventional wisdom now is that she should delay the benefit as long as possible. Letting your Social Security benefits grow, uncollected, is like buying an annuity yielding 7.25 percent. That income stream will last the rest of your life, and grow with inflation. And if you plan or expect to live beyond 80, most when-should-I-start-my-benefit calculators will tell you to wait as long as possible.

But, I wonder about that. The woman who defers her benefit from 62 to 66 is giving up $36,000 in benefits right at the start of her retirement, not counting cost of living increases. Presumably, she’ll have to take that $36,000 out of her retirement account to live on. What if it’s all taxable? She will have to take extra out for the tax. She’ll give up income she would have earned on her own investments, too.

So I asked a couple of financial pros for advice…now or later? And here’s what I discovered: Even very smart people, armed with the best spreadsheets Microsoft Excel can produce, can have very different answers.

“You’re better off giving your portfolio a chance to grow, as long as you are comfortable that you can earn at least 2.7 percent a year on it,” says Mark Tepper, with Strategic Wealth Partners, in Seven Hills, Ohio. “I completely disagree with anyone who says you should defer your Social Security payments.”

That would include Chris Abts, a retirement planner with Cornerstone Retirement Group in Reno, Nevada. “We’re just going to have more income if we delay,” he says. “If we compare someone who takes it at 62 to someone who takes it at 70, the difference in benefits is 80 percent or more. What’s the chance they can increase the income from their investments by 80 percent over those eight years?”

Abts argues that because the Social Security benefit is guaranteed, and it is guaranteed to keep up with inflation, letting it get as big as possible is the better choice. Furthermore, he notes that many well-to-do retirees who are also going to have other taxable income will see as much as 85 percent of their Social Security benefits subject to income tax. (That happens, for a single person, when their income and half of their benefits adds up to $34,000 or more.)

And so, both planners worked up spreadsheets for a hypothetical retiree with $500,000 in assets, showing how starting benefits early, or delaying them, would work out.Tepper’s spreadsheet shows the person needing $60,000 in income from the start, delaying their Social Security benefits until age 70, and then running out of savings by age 73, at which point their benefits alone provide $43,000 a year in income. Abts shows the same person growing their savings and their benefits forever.

What were the differences? Tepper assumed a very low rate of investment return, 2.7 percent, and high initial withdrawals of $60,000 a year. Abts assumed the retiree would live on withdrawals starting at $21,120 until her Social Security benefits started. He assumed 6 percent investment growth. (He also advises new retirees to live as lean as possible their first few years and use that time to transfer funds from tax-deferred retirement accounts to tax-free Roth IRAs. That’s a compelling strategy that will provide fodder for a future article.)

So, what’s the takeaway? Here are a few thoughts.

* There’s no answer that is right in all situations. There are a lot of variables, including (1) How much you have in savings; (2) Your expected investment rate of return; (3) Your tax rate, and the expected percentage of your retirement income that you’ll be withdrawing from tax-deferred accounts; (4) Whether¬† you have a spouse who can defer his benefits until much later; (5) How long you expect to live; and (6) What other assets or income streams (such as a fixed pension or a house) could you fall back on.

* You should crunch your own numbers. Try the “Should You Start Social Security Early” online calculator, created by Henry Hebeler, a former top Boeing executive. Or hire a smart numbers person — a CPA or actuary or independent financial adviser — to do some spreadsheets that are specific to your own situation.

* Don’t let the “the Social Security program going to disappear soon so I should take my benefits ASAP” argument sway you. Even the most hawkish anti-entitlement politicos aren’t talking about taking benefits off the table for anyone within 10 years of retirement.

* Bottom line? If you have a short lifespan or a spouse who will be taking a much bigger benefit later, it’s probably better to start benefits early. If you have a lot of money and other assets, it probably doesn’t matter much which choice you make. If you expect to live long and are depending on every penny, all of those other factors probably will determine what you choose, and you’ll have to go to the spreadsheets.

14 comments

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Posted by Do you know when to start collecting Social Security? | Social Security Disability Blog | Report as abusive

Part of the equation is wholly subjective. Must I keep on working – or retire, now, retire early?

I chose the latter because I was just exhausted from so many years competing in sales arenas from computing to construction. Am I glad I did did so – regardless of slightly diminished [so far] SSA?

You betcha.

Among other benefits, my life online, blogging personally, contributing editor for a significant politics/technology site, time to read – actually time to learn a lot about investing for the first time in my life – has all made a qualitative difference.

Time I didn’t have before I retired.

Posted by Eideard | Report as abusive

OMG,

most people should not delay their S.S. payments.
1) Waiting until you are 70 30 percent of us will already be dead.
2) Break even point is age 72 when if you had waited until 66 plus you will start getting more from S.S.
3) if you really believe S.S. benefits will keep up with inflation in the future the past two or three years should wake you up reality there was no inflation increase they rig the numbers now to show no inflation.

Posted by JEYF | Report as abusive

Delaying from 62 to 66 in my case has a tipping point at around age 73 where the difference in waiting consistently pays more per month. This is based on assuming the COLA on the early money in years 63-66.

To offset that extra income, I’ll need to keep working or withdraw more from my IRA & 401ks.

Since my wife and I have the main goal of doing our traveling and recreation earlier in retirement, we can use the money sooner. The reduced benefit seems to be offset by having funds early, having time to enjoy the earlier years, and keeping the IRA/401k balances higher.

Posted by mikemm | Report as abusive

From a macro-economic sense; the US has a huge amount of debt; with a long term tepid economy and world thats evolving a distributed power structure (economically not militarily) spending must be cut and taxes need to be raised. Every single serious economist will tell you the same thing. However with politics being what it is the two parties focus on one or the other in a unrealistic manner. The deadlock makes it impossible to limit large entitlement programs like social security or raise the funds to properly administer them.

We’ve seen this scenario before in history and the result is always the same. If you cant balance the budget over a decade or two the currency is usually deflated to meet the debt obligations. Standards of living decrease but no major political compromises are needed and people live in constant hyper-inflation.

THAT is the future of social security. It might be next year or it may be ten years from now but at some point our real inflation rate will hit 10%+ and the inflation rate of SS will be under 10%. Its possible we could get a spread of -%10. You will be losing money big time if you wait to get your money out. Take out the SS money and put it in a real inflation adjusted asset if you want to play it safe or invest in something more aggressive if you want to increase your wealth. Noone in their right mind would say SS is a good investment vehicle.

Posted by John2244 | Report as abusive

u can use the money when u r still young.

At 70+ u might not be healthy enough to enjoy, so what is good to have more $ if u r sitting on a sofa all day?

Unless u just want to leave more $ to your heirs… but that’s a different story.

Posted by robb1 | Report as abusive

This is not a wholly mathematical question. I went at 57 on a defined benefits plan. The difference in money is roughly equivalent to SSA, but the fact is you have exactly one life, and if there is any time left to do wild and crazy, it is in the years before 65. Yes, you can have a good life after 65, but your knees, stamina, and general conditioning do degrade. In the two years since I retired I have sailed the oceans, lived like both the rich and poor in foreign lands, rafted the rivers, read the books, drank the wine, dug deep holes and planted trees, cleaned streams for trout, and flirted with every woman that seemed faintly interesting. Day one, week one, 0 dark hundred, I watched +10,000 Snow Geese take off at one time headed for breakfast. I am NOT going back in the box.

Posted by ARJTurgot2 | Report as abusive

First off, about Social Security payments keeping up with inflation cost of living increases ; it IS not and HAS not for several years gone up, especially for people disabled or suddenly unable to work. So for all prices rising, these people are struggling with paying bills.
The way it was worked around,was the government stated there were no cost increases for the past 3 years, and they are saying there will be none for the next 2…

2nd Deferred SS ; SS for disabled and suddenly unable to work people is capped, based on income, and size of household.

3rd Deferred ; Deferring in my opinion is not wise, they are talking about cutting the amount a person would get in future for ‘new’ SS recipients. Better to take what you paid in and legally have the right to now, than roll the dice and hope you get what you paid in later.

With all the hoopla, its better to be safe and practical vs greedy.

Posted by HurleyRez | Report as abusive

@ARJT – “0 dark hundred” been awhile since I heard that. I went hard for Uncle Sam long enough to retire. Diversity, patience and perseverance still pays dividends. Free spirits reap rewards the rest never know.

Posted by pHenry | Report as abusive

I didn’t see where anyone included a time value of money calculation on the early payments of SS. In most cases it takes the “breakeven” beyond age 73 – especially for those who will not meet full retirement age until 66. The other factor is this: WE ARE OVER $14 TRILLION IN DEBT!!! Yet people still believe in government “guarantees”? Pensions don’t work either. That’s why most corporations -at least those in control of their businesses instead of unions – provide 401k’s instead. If you are already collecting one, great. Aside from probably never getting a COLA you may have made it under the wire. Otherwise, each of us must be responsible for our own financial lives! Why do so many want to be serfs?

Posted by beofaction | Report as abusive

On average, discounting the payments appropriately, the total value of your Social Security benefits will be the same whether you start early or wait to collect.

Yet for those without a pension, Social Security offers a valuable promise — lifetime income. You could purchase a private annuity, but those are VERY expensive and benefit the insurance company more than the buyer.

When planning your retirement, take a stab at four different scenarios:
(1) You die at the age of 70 from a sudden heart attack.

(2) You die at the age of 80 with your final year spent in a nursing home.

(3) You live a (relatively) healthy and active life through the age of 90, then another five years with assisted living before you finally die at the age of 95.

Planning for the first scenario is easy. Almost everybody will have enough money saved for THAT option. The second scenario is what financial planners typically focus on. This is pretty much the norm. But the third scenario is increasingly common, and a POSSIBILITY in most cases.

Delaying Social Security offers greater protection in the “difficult” scenario, thus it is the better choice for those who can afford to do so. Of course if you have no savings, there isn’t really any choice at all.

Posted by TFF | Report as abusive

I originally planned to take an early retirement from what I do for a living and start my own business in a field related to what I do for fun.

I had to change my mind a few years ago when the economy tanked.

I considered the government’s options for resolving this mess:

1. nationalizing the banks (debts AND assets including their money-generating apparatus)

2. widespread financial hardship and austerity on a grand scale

3. government-sponsored inflation on a grand scale

(It never really occurred to me that the government would choose to nationalize corporate debt on such a grand scale. I didn’t think that was legally possible and I didn’t think Americans would stand for it.)

I really underestimated the heinous nature of our elected officials.

I ended up setting aside my self-employment aspirations due to increased economic uncertainties and a painful drop in the value of my assets. Fortunately, I still have my job so I can try to replace what was stolen from me.

I wouldn’t enjoy excessive amounts of leisure. The key to happiness is balance.

The way I see it now, if I drop dead at work 15 years beyond my original retirement date, the Social Security system will be just a little better off for it. Sadly, the labor market will be just a little worse off for it.

And I’m still hoping to get a chance to strike out on my own.

Posted by breezinthru | Report as abusive

Here’s our situation:

1. A “Union Sheet Metal Worker” who was able to receive a PENSION @ age 52 (Local pension)

2.International (Union pension) was acquired at age 59 1/2 yrs old.

3. Started receiving (EARLY) S.S @ 62.

4. Started a (IRA) CD a few years ago (Another source of small/steady income!)

Due to a “GOUT” affliction I acquired in my late forties I could see the “Writing on the Wall” as far a my physical/work/abilities were concerned!
That’s why (I) retired when the getting was GOOD!!!

I might add that we’ve got ABSOLUTELY NO REGRETS!

Posted by Middleclassman | Report as abusive

For those who are interested here is a website that provides free calculators that use the information on your social security statement page 2 to illustrate Social Security Benefits at various ages 62-70. The website also has a calculator that help determine the taxable amount of social security benefits.

http://www.socialsecuritymax.com/

Posted by sjason | Report as abusive

Well, this article leaves out an important point which leaves the reader to think accumulation of benefits occurs if you have stopped working prior to the age you intend to receive your benefit. If you stop working at age 62, you will get penalized for not continuing to add to S.S. unless you have maxed out your benefit for 35 years, which most people have not. So, if you stop at 62 and delay until 66, you will get a penalty. There is a whole lot more that goes into the calculation than just should I delay or not delay, and it should be solely based on your financial plan. Talk to an advisor that understand S.S. benefits and you will walk out a winner.

Posted by Hutchista | Report as abusive