Over a year ago I wrote a post titled Why Taking Social Security Early Might Be the Best Option.
It was me wondering if taking Social Security (SS) early was a good move — despite the conventional wisdom that the longer you can delay, the better.
Then I did Retirement Interview 26 where the interviewee said this:
Regarding Social Security, here is what we did. Many experts suggest that if you can wait until age 70 to begin payments, you should do so. I’m afraid our decision flew in the face of this conventional wisdom.
In the case of my wife and I, we do not need to spend our Social Security payments, so we planned to invest the full amount. To determine the best claiming age under this “claim and invest” strategy, I put together a detailed spreadsheet that modeled how social security payments invested monthly for both my wife and I would accumulate until age 95 under four claiming scenarios:
(1) both of us claim at 62
(2) both of us claim at FRA
(3) both of us claim at 70
(4) my wife claims and 62 and me at 70.
For each scenario, I did a sensitivity analysis of how the accumulations would change under various inflation and investment return assumptions. The spreadsheet model included the effects of income taxes and the compounding effect of investment returns and inflation, which other breakeven calculations typically ignore.
Bottom line, I found that if we achieved an average yearly after tax investment return of 5% or more, then the scenario of both of us claiming at age 62 was the clear winner. If we assumed a more modest investment return of 2% after tax, then the scenario of both claiming at age 70 was the winner. Even in this case, however, the both claim at 62 scenario had the higher accumulated balance until around age 85. After seeing the results of this analysis, the both claim at 62 option was looking pretty good to me.
Hmmm. This was something I wanted to know more about.
So I emailed him the following:
You don’t happen to have (or would be willing to do) a write up of your Social Security analysis, do you? I think many people would find that enlightening and interesting.
He said he would write something up and that is what follows. I think you’ll be quite intrigued with it, especially if SS is “extra” (non-essential) income for you.
Here we go…
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For most retirees, Social Security is an indispensable part of their income. The retirement literature is full of advice regarding the best age at which to claim Social Security retirement benefits. In large measure, the advice boils down to the following:
- If you have a below average life expectancy or if you urgently need the money, then claim at age 62 when you are first eligible;
- Otherwise, wait until your Full Retirement Age (FRA) or better yet age 70, at which point your monthly benefit will be substantially larger than if you had claimed earlier.
No doubt this is solid advice for the majority or retirees, who rely on Social Security to cover their expenses. However, what about retirees who already have their expenses fully funded from other sources, like defined benefit pensions, 401Ks and IRAs, investment income, etc.? These retirees will likely claim Social Security retirement benefits if eligible, but they won’t spend their monthly payments. Instead they will invest them, and ultimately distribute the proceeds to heirs or charities as part of an estate legacy.
Retirees with a long-life expectancy who follow this “claim and invest” strategy could clearly wait until age 70 to start their Social Security benefit as suggested by conventional wisdom, but would this necessarily be the optimal path?
That was the key question my wife and I faced recently in our deliberations about when to claim Social Security retirement benefits. For context, I retired about 6 years ago, in my mid 50’s. My wife is the same age as I am, and is also retired. We have both qualified for Social Security retirement benefits based on our extensive work records.
As we approached age 62, I began investigating what our best claiming age would be. We are both in good health and have a history of longevity in our families. In addition, we don’t need the Social Security payments to fund our lifestyle. We have 401K and IRA accounts worth about $2.5M, taxable brokerage accounts worth about $12M, a house and other tangible property worth about $0.7M, and we draw defined benefit pensions of about $80K per year.
Given that we have no debt and lead a relatively modest lifestyle, our investments and pensions provide more than enough income to fund our living expenses. As such, our plan was to invest our Social Security payments, with the intention of adding them to our eventual estate legacy.
Regarding our optimal claiming age, my starting assumption was that we would both wait until age 70, per conventional wisdom. However, I am not the type to blindly follow guidance, so I decided to conduct an analysis to determine what claiming age would be best for our specific situation.
Reviewing the Options
The first step in my analysis was to identify alternative claiming scenarios. I came up with four scenarios, which specify different ages that might make sense for us to commence our Social Security retirement benefits:
- Both of us claim at 62: In this scenario my wife and I both claim at age 62, which is the earliest possible age for us to start receiving Social Security retirement benefits. I think of this as the “take the money and run” scenario. From the viewpoint of a claim and invest strategy, this scenario provides the longest period of time for the compounding of investment returns. In addition, if future Social Security reforms were to cut or eliminate our monthly benefits, this scenario would allow us to collect as much as possible before those potential cuts would be enacted. Our combined benefit if we started payments at age 62 would be $3,663/month, which would be significantly less than if we waited until a later age to claim.
- Both of us claim at Full Retirement Age (FRA): FRA is the age at which we would be eligible for our full Social Security retirement benefit. For both my wife and me, our FRA is 66 years and 8 months. Our combined benefit if we started payments at FRA would be $5,082/month.
- Both of us claim at 70: Our combined benefit if we started Social Security retirement payments at age 70 would be $6,437/month. This would be the maximum combined monthly benefit possible for us. This scenario would also provide the highest possible survivor benefit for whichever spouse lives longer.
- My wife claims at 62 and I claim at 70: In this hybrid scenario, we would begin receiving my wife’s Social Security retirement benefit when she reaches age 62. This would allow us to take advantage of longer compounding returns and provide some protection against potential future Social Security cuts, as in scenario 1. We would postpone my Social Security retirement benefit, which is the higher of the two, until I reach age 70. As in scenario 3, this ensures that I would receive my largest benefit possible, and that whichever spouse lives longer would receive the maximum survivor benefit. My wife’s benefit if we started her payments at age 62 would be $1,523/month, and my benefit if we started my payments at age 70 would be $3,745/month.
Analyzing the Options
The next step in my analysis was to perform a quantitative assessment of these scenarios. To do this, I created a spreadsheet model that calculated the after-tax market value of the nest egg for each scenario by month from age 62 until age 95. I chose age 95 as the cut-off because this is the approximate upper historical bound of longevity in our families.
For each month from age 62 to age 95, the spreadsheet increased the after-tax market value of the nest egg for each scenario by the amount of the Social Security payments invested that month net of income tax, and by the after-tax investment returns achieved during that month on the portfolio balance.
Here is some additional detail about the factors included in the spreadsheet model:
- COLA for Payments: I incorporated an annual Cost of Living Adjustment (i.e., a COLA) for the monthly Social Security payments. As a baseline, the model assumed a 2% annual increase. Note that I did a sensitivity analysis using higher and lower COLA rates, but they did not change the relative positioning of the scenarios in the final results.
- Investment returns: For each scenario I modeled both a conservative return option (3% annual return before tax), and an aggressive return option (7.5% annual return before tax). For simplicity, the spreadsheet model assumed that investment returns occurred in a linear fashion throughout the year. In other words, Monthly Investment Return = (Annual return rate / 12) * (Monthly Starting Balance). It is clear that actual returns will not follow a smooth linear progression; I made this assumption to make spreadsheet modeling manageable.
- Federal and state income taxes: The spreadsheet model assumes that income tax on each monthly Social Security payment is paid in full as soon as the payment is received, and that the net amount is then immediately invested. The spreadsheet model also assumes that tax on investment income is paid in full at the end of each month for the returns made that month. All Social Security payments and investment returns were taxed as ordinary income, using our highest Federal and state marginal tax rates. These timing and tax rate assumptions were made to simply spreadsheet modeling. They are conservative in the sense that they do not factor in potential preferential tax treatments (e.g., lower tax rates for qualified dividends and capital gains, possible elimination of income tax via a step-up in the cost basis at death, etc.), and they limit the compounding effect by assuming all taxes are paid immediately.
- Survivorship: For each scenario, the spreadsheet calculates the after-tax market value of the nest egg by month if both of us live to age 95, as well as the after-tax market value of the nest egg by month if one of us lives to age 95 and the other passes away at age 75. Obviously, there are a very large number of survivorship possibilities, and it was not feasible to model all of them. I chose this specific case to give a sense of how the after-tax market value of a scenario would be impacted if one of us passed away relatively early.
The spreadsheet allowed me to easily compare the size of the after-tax nest eggs for the scenarios, for both the conservative return option and the aggressive return option. For any month between the ages of 62 and 95, I could easily spot which scenario yielded the largest after-tax nest egg under each return option, and by how much. I could also easily spot the breakeven age for one scenario versus another for each return option.
Note that the calculations underlying the breakeven age in my spreadsheet are quite different than the typical breakeven age calculations referenced in the retirement literature. Typical breakeven analyses simply calculate the age at which two Social Security payment streams reach equivalency (e.g., the age at which the summation of lower Social Security monthly payments starting at age 62 would equal the summation of higher payments starting at age 70).
These simplified calculations are not very useful when evaluating a claim and invest strategy, because they do not factor in the compounding effect of returns on the invested payments, the Cost of Living Adjustments (COLAs) for payments, or the effect of income taxes on payments and investment returns. My spreadsheet model accounted for these factors, albeit in a somewhat simplified manner. As you will see below, these factors can make a big difference.
The Results
Bottom line, here were the results of the spreadsheet model for our specific situation:
- If my wife and I employed an aggressive return approach (i.e., 7.5% annual return before tax), then the both of us claim at 62 scenario was the clear winner. By this I mean that for every month during our retirement through age 95, the after-tax market value for this scenario was higher than the after-tax market value for all other claiming scenarios. This also held true whether my wife and I both lived to 95, or if one of us lived to 95 and the other passed away at 75. Furthermore, if we were to employ tax optimization techniques (e.g., buy and hold equities for extended periods to take advantage of lower capital gains rates or a step-up in capital gains at death), then the both of us claim at 62 scenario would have an even wider lead over other scenarios.
- If my wife and I employed a conservative return approach (i.e., 3% annual return before tax), then the scenario both of us claim at 70 was the ultimate winner if both of us lived to age 95. However, the both of us claim at 62 scenario was in the lead until age 86, and only finished about 10% behind the both of us claim at 70 scenario in terms of nest egg size if we both lived to age 95. Also, if only one of us lived to 95 and the other passed away at 75, then the both of us claim at 62 scenario was the winner.
- Note that in our case, a classic breakeven age calculation (i.e., calculating the age at which the payment streams reach equivalency) for the both of us claim at 62 scenario versus the both of us claim at 70 scenario is about 80.5 years of age. Contrast that with my spreadsheet model, in which the breakeven age is 86 under a conservative investment approach and over 95 for an aggressive investment approach. Cleary, accounting for factors such as the compounding nature of investment returns significantly extends the breakeven age for the both of us claim at 62 scenario versus other scenarios. This helps to explain why the classic advice of waiting until FRA or age 70 to claim Social Security retirement benefits does not necessarily yield the best result for those following a claim and invest strategy.
Evaluating the Options
After crunching the numbers, the both of us claim at 62 scenario was looking pretty good to me. The final step in my analysis was a qualitative assessment of how our claiming scenarios could be impacted by potential future changes to Social Security.
It is well known that Social Security is facing long-term financial problems. According to the 2020 Social Security Trustees Report, the Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay scheduled benefits only until 2034. At that point, the trust fund will be depleted and continuing tax income will be sufficient to pay only 76 percent of scheduled benefits.
Even when OASI is combined with the better-funded Disability Insurance (DI) trust fund, combined OASDI funds would be able to pay scheduled benefits only until 2035. At that point, the combined trust funds will be depleted and continuing tax income will be sufficient to pay only 79 percent of scheduled benefits.
It should be noted that the 2020 Trustees Report did not include the impact of the COVID-19 crisis, which has significantly decreased the amount of payroll taxes that will be collected in 2020 versus expectations. Due to COVID, many experts believe that the OASDI funds will exhaust several years earlier than projected in the 2020 Trustees report.
Given this backdrop, I believe there is a high likelihood that Congress will take actions within the next 5 or 10 years to shore up the financial position of Social Security, either by increasing revenues or reducing costs. The question for my wife and me is how these actions might affect our monthly benefit.
Most of the proposed corrective actions seem to focus on increasing Social Security revenues, such as increasing the payroll tax rate, increasing the amount of earned income subject to the payroll tax, etc. Proposals that increase revenue could shore up the financial position of Social Security without necessitating a benefit reduction for any current retirees. In other words, if these proposals are enacted they would likely not have an impact on my wife’s or my monthly benefits.
However, cost reduction measures have been proposed as well, some of which could reduce or eliminate the benefit for current retirees. One of the more prominent examples is means-testing. Under means-testing, a current retiree’s Social Security benefit would be reduced or completely eliminated if they have substantial non-Social Security income. While the income thresholds for benefit reduction vary among means-testing proposals, the Social Security retirement benefit for my both wife and me would be completely eliminated under every proposal variant that I’ve seen.
From what I can discern, means-testing does not currently appear to be a leading candidate for Congressional adoption. Nevertheless, there does seem to be a general sentiment on the rise in the US that wealthy people should pay more in taxes and receive less in government benefits than they do now. I believe this sentiment could influence the political decision-making process regarding Social Security in the coming years.
Accordingly, I believe there is a decent chance that means-testing or some other benefit reduction scheme could be adopted, which would eliminate or significantly reduce the benefits for my wife and me. This suggests that the both of us claim at 62 scenario would be best for us – i.e., that we should “take the money and run”. The earlier we claim, the more total money we would receive in the event that our payments would be reduced or eliminated in the future.
With the results of both the quantitative and qualitative analyses pointing in the same direction, my wife and I opted for the both of us claim at 62 scenario. Admittedly, there are several potential future states in which this decision would not be optimal.
For example, in this scenario we could be exposed to a sequence of returns risk for our invested Social Security payments. More specifically, if we adopt an aggressive investment approach with a heavy emphasis on equities, and if we experience a severe and protracted bear market let’s say 5 years from now, then a large part of the nest egg we would have built up by claiming at 62 would be wiped out. In this case, we almost certainly would have been better off claiming later, at FRA or age 70.
Similarly, if my wife and I both live to age 100 and Congress never implements means-testing, then claiming at age 70 would certainly have turned out better.
My wife and I are mitigating these risks in the implementation of our both of us claim at 62 scenario as follows:
- I believe equity markets are currently overvalued, so we have opted to start out with a conservative investment approach (30% equities, 70% short-term fixed income). This will help to mitigate a sequence of returns risk in the event of a severe market decline. If markets become more reasonably priced in the future, we will move to a move aggressive approach.
- Under current Social Security rules, my wife and I could suspend our benefits at FRA, and restart them at age 70. By doing this, we would earn delayed retirement credits which would result in a higher benefit when we restart payments. If it becomes clear in the next 4 to 5 years that Congress will not implement a means test or some other scheme that reduces our benefit, and if my wife and I remain in good health, then we may consider doing this. Suspending our payments would provide a higher survivor benefit for sure, and it could also yield a larger nest egg depending on how long we live.
Conclusion
After conducting this analysis, the only thing I know for certain is that nothing is certain. The future is inherently unknowable – we don’t know how long we will both live, we don’t know what will happen to Social Security in the future, we don’t know what future market returns will be, etc.
As such, our best bet is to select a claiming scenario that yields a decent outcome no matter what happens. In our case the both of us claim at 62 scenario provides the best outcome for most future states, and it provides a good outcome for the remainder.
Perhaps most importantly, it eliminates the worst possible outcome. That is, if we had decided to wait until age 70 and Congress were to implement a means test just before our payments were to start, we would get nothing. In that case we would be facing a boatload of regret rather than a boatload of cash, and that is the one outcome I would have trouble living with.
Interesting thoughts, I didn’t know a mean-testing or similar was being evaluated.
Would like to have his spreadsheet to run scenarios
Thanks for your comment Dsw. If you google phrases such as “means testing social security” and “social security reform proposals”, you can find a wealth of information about measures are being considered to shore up the finances of the social security program. They can give you a sense of what may happen in the future.
Regarding my spreadsheets, please understand that they are very customized and “hardwired” for the particular case of my wife and I. They would require pretty massive revisions to be useful for anyone else’s scenarios, and in fact even figuring out how to modify them would be difficult because there is no documentation. As such, I don’t feel comfortable sharing them, as I feel they would likely be more dangerous than helpful. Sorry about that.
Wow. That was fantastic analysis and thank you for doing all the work and sharing it with us.
It does seem like a bird in the hand may be the smart approach as talks of social security being unsustainable at current levels has been increasing in intensity.
I doubt by the time I retire I will have amassed your net worth but I should be in a similar position financially where I would not need to use the SS payments for living expenses and thus could employ a similar strategy.
I think the claiming as early as you can method will be the best as the breakeven point is still in the early 80s with a conservative approach.
Thanks for sharing your thoughts Xrayvsn. Depending one’s circumstances, I agree that the “bird in the hand” or “take the money and run” approach may be the way to go. I think that is especially true for those planning to claim and invest the money.
In any event, good luck in building your net worth before retirement. That is probably the best defense for whatever may happen to social security in the future.
Great article, I may have to create a spreadsheet of my own to test scenarios too. Another viewpoint vs opensocialsecurity.com.
Thanks for your comment Dan. I would definitely encourage you to build spreadsheet models to test your own scenarios. I am not a spreadsheet aficionado by any means, and at the outset I didn’t have a good view of exactly how I wanted to analyze our situation. So it took me several days to iterate my way into a final spreadsheet that was clunky but useful. I felt it was worth the time, however, and I’m sure a more competent person could have created a much more elegant solution in a shorter period of time. So good luck if you decide to do it.
Age 49, I have come to the same conclusion even though I won’t have 1/3 the net worth of the author. I think if you are in the situation where you don’t “need” SS it will almost always be better to start at 62. Being a few years behind the author, I fear means-testing much more which leans me into 62 regardless of the other factors. That said considering most break-even points are 85+ that’s when RMD’s start to ratchet up as well. I would rather have additional $$$ earlier in my retirement. The only way I don’t claim at 62 is if I’m still working. While I won’t need to, I’m the type of person that can’t sit still so it’s still 50/50 if I will be or not when I get there. Great article enjoy your retirement.
Thanks Chris and I think you bring up some great points, particularly the one about people who are still working at 62. My claim and invest at 62 approach would not be feasible in that case, since social security income limits would likely preclude people claiming early.
Great analysis. My wife and I are about the same age as you, so this was very timely. Can you also summarize the other 2 analyses and how they compared:
– Both of us claim at Full Retirement Age (FRA)
– My wife claims at 62 and I claim at 70
Hi Paul, thanks for you comments. To answer your question I looked back at my spreadsheet. In a nutshell:
1) If you use an aggressive investment approach as I defined it (i.e., 7.5% per year before tax), then the breakeven for the “Both at FRA” and the “62/70” claiming scenarios versus the “Both at 62” scenario is over 95 years of age. In other words, the “Both at 62” builds a giant head start, and neither the “Both at FRA” or the “62/70” scenarios would ever catch up. Furthermore, if you both died relatively early (e.g. age 80), or one died at 75 and the other at 95, then the value of the “Both at 62” would be about 15% higher than the other two scenarios.
2) If you use a conservative investment approach as I defined it (i.e., 3% per year before tax), then breakeven for the “Both at FRA” and the “62/70” claiming scenarios versus the “Both at 62” scenario is about 86 years of age. If you both lived to 95, then the “Both at FRA” and “62/70” values would be about 7% higher than the “Both at 62” value.
I hope this helps.
Does this analysis assume that your wife’s social security benefit is less than half of yours at your FRA? And does your earning history have 35 full years of maximum social security taxable income? Plus in your case are you including earning an income through age 70, which subjects most of the Social Security to being taxed as additional income, and then the likelihood of not earning income after 70 at which point less of the Social Security would be taxed? I’m very interested in those criteria because I’m retired, age 64 and also do not need Social Security. I have six figures of earned income annually and had planned on waiting until age 70. This is the first study I’ve seen that doesn’t show waiting to age 70 unless you need the money is the better choice and it is making me question that. My logic has been that my wife will likely out live me by a couple of decades and leaving her the biggest possible benefit would be a comfort to her, and somewhat easier to handle since a direct deposit each month that covers most of her needs might be more manageable than a drawdown strategy of a bigger portfolio, once she is in her nineties. I think it would be for me too if the situation was reversed. Neither one of us is very adept at spending from our nest egg but find spending what I make from my hobby income to feel “normal”. I realize math should rule but if the two outcomes are close enough to be similar then the one producing an inflation corrected income stream might have some psychological advantages. Another thought is that up until now changes to the system have grandfathered in people who were already eligible to draw benefits. I think it is likely that even if means testing was incorporated in some manner it would only be applied to future participants. I don’t think they would ever be able to take away a benefit from someone already receiving it. I can’t think of a single instance where that has occurred in the past but that isn’t a guarantee of future results I suppose. Now I’m just a little perplexed, I don’t get this feeling often since I retired, kind of reminds me of how I felt back when I was working full time!
Hi Steve. Here are answers to your specific questions:
1) At FRA, my payment would be $2,957 and my wife’s $2,125, for a total of $5,082.
2) My work history has about 29 years of full-time employment, of which maybe 25 or so were at max, I also had 6+ years of part-time employment where I paid some payroll tax, but far less than maximum. So I do have some earnings for the full 35 year social security period.
3) My earned income stopped about age 57, so I don’t include any earned income after that in any of my modeling. However we have very substantial “unearned” (I hate that term) income, which means that our social security income (or at least 85% of it) is taxed at a very high marginal rate. Basically, our investment income is at a level where potential tax optimizations around the timing of social security payments, RMDs, Roth conversions, etc. don’t help us, so I don’t know much about strategies involving that.
Having said that, I certainly understand the desire to leave your wife the largest benefit possible. Waiting until you are 70 to claim so you can maximize her survivor benefit makes a lot of sense, in my opinion. Another option could be to use a reasonably priced financial advisor to help manage the portfolio investments and drawdown strategy. That could alleviate the stress on your wife to figure out on her own how to do it. My 89 year old mother-in-law has absolutely no interest in financial management. I helped her get set up with Vanguard Personal Advisor Services to manage things for her, and is she is quite happy with them.
A word of caution, however. I would suggest you study up on the various means-testing proposals. As currently constituted, they would indeed stop/reduce benefits not only for future retirees, but also for those already receiving them. This would only apply to people who have very substantial non-social security income, however.
Wow! Thank you for taking the time to share your findings in such detail and so clearly. This is something me and my husband have been wrestling with, so it’s greatly appreciated.
One question: What does the “70% short-term fixed income” investment look like specifically?
Hi Anya, thanks for your comments.
In our case, I use the following investment vehicles for short-term fixed income:
1) I use short-term or ultra-short-term bond funds from Fidelity, Vanguard, and T Rowe Price. They have good funds with reasonable expense ratios.
2) I have some money in longer-term CDs. I lucked out by signing up for some longer term CDs a while ago at about 2.5%. Current CD rates are so low I don’t invest any new money here, but I thought I’d mention for completeness.
3) I have a substantial amount invested in money market funds in Fidelity, Vanguard, and T Rowe Price. I use government funds and some prime money funds. This as very short-term fixed income, almost like a cash equivalent. Thye don’t pay much, but are relatively safe and liquid.
4) I know a number of people who buy individual short-term corporate or muni bonds. This can be a good alternative but I just don’t know enough to pick individual bonds, so I stick with traditional mutual funds or ETFs.
5) Finally, in our 401K accounts we have an option to invest in “stable value funds”. These have a lot of the properties of short-term fixed income, so I invest some of our short-term fixed income allotment in these.
Basically, I look for high-quality, low-cost bond funds that stick to the short end of the yield spectrum so that I’m not subject to too much risk from rising interest rates. I’m basically looking for capital preservation and liquidity with these investments, with a modest return. I’m using these short-term investments as sort of a safe parking lot for my money for now. I eventually intend to move this money into equities or longer-term bonds, but only when I believe the valuations are more reasonable.
Hey there again RI-26,
I know some others have gone down the road of this analysis as well but you basically took one of my projects that I wanted to do in the next couple of years and laid it out perfectly as I would have done it. Thanks for that! I have often wondered about how those four strategies would play out.
Since I’m only 53 (about to turn 54 on Halloween) I figured I could punt on the decision a few more years and see how things play out.
The two questions/considerations in my mind that would lead me to question the claim and invest strategy are as follows:
1) Does the “big number” aspect of your scenario skew the returns? Meaning, what if someone was going to achieve 50% or less than your social security earnings? It’s possible the numbers scale either way toward the same conclusion but I’m curious.
2) Claim and invest still involves some amount of market timing and performance expectation. A very poor performance, poorly timed entry and/or sub-par returns could flip that scenario. Of course, there’s no way around that and history tells us that we should still be okay but the possibility exists. Even as an avid stock investor/trader who keenly watches the markets and also thinks the markets are overvalued, I have proven (to myself at least) that trying to time them is a fool’s errand. If you are invested 30/70 currently it’s because you believe there will be a better opportunity in the future to readjust … but what if the markets continue to trend higher for the next decade, or longer. Most, and I’d be in this camp as well, would be unwilling to adjust the diversification to a higher equity % if the ‘overvalued’ argument was still the belief. Of course, your 30% would be outperforming and would still achieve your “greater than 3% scenario.
These are not scenarios you need to respond to but more rhetorical thoughts. Any time investment returns are key determinants, there always has to the “what if” discussion about the risks too versus ‘the bird in hand’ of age 70 SS amounts.
Of course, I’m a huge believer in the markets and the returns they can achieve/return.
Thanks for this! Awesome read!
Hi Jeff, welcome back! Turning a year older every Halloween is about the scariest thing I can think of. Poor guy.
You make a number of great points. Here’s my 2 cents on your items:
1) I interpreted “big number” to mean the monthly social security payments for my wife and I. Assuming I got that correct, then my belief is that the relative positioning of the scenarios would likely not be different if the social security payments happened to be lower, or for that matter higher. The biggest driver by far in the performance of the scenarios is the compounding effect of the returns over time. Relative scenario performance is driven by differences in the annual return rate and the number of years the investment has to compound, but should be independent of the payment amount. I stress this is just my belief, I haven’t done the modeling it to verify whether my belief is correct or not.
2) I 100% agree that actual market timing and performance, the sequence of returns in the markets, etc., will go a long way toward determining which claim and invest scenario ultimately wins. My spreadsheet model was hopelessly oversimplified when it comes to these factors. A more robust analysis could back test against prior returns over long periods, could involve a Monte Carlo analysis, etc. In my case, I had no interest in investing the time to do something more sophisticated. Just modeling the theoretical average in my spreadsheet was good enough for me. On a positive note, I would observe that the regular monthly investments in the claim and invest approach are tantamount to a dollar cost averaging scheme, which can work pretty well over long periods even with market gyrations.
3) For me, I tend to think of taking the money at 62 as the “bird in the hand” scenario, as the near-term payments are certain. But yes, once invested the money is at risk so maybe not so certain after all. I think you bring up very interesting perspective of the potential for a “bigger future bird in hand” by taking the money at 70. I think that is an interesting perspective as well. Of course, the future bird is not certain given the state of social security, plus the future bird once invested in the becomes at risk as well. So there as risks both ways.
4) The bottom line good news is that by definition, anyone who follows a claim and invest strategy for their social security benefit probably will never need the money for themselves. So even if they don’t end up picking the optimal scenario, it shouldn’t really affect them all that much.
I think if you have a taxable brokerage account worth 12 million, you can take SS whenever you want! It is unlikely you will ever run out of money! Or did you mean 1.2 million?
Hi Laurel. I really did mean 12 million. Yes, that amount (and relatively modest expenses) pretty much means that my wife and I could take SS whenever we want with little fear of ever running out of money.
While funding our retirement is our top priority, my wife and I are also very keen on leaving a substantial legacy to our daughters, other family members, charitable causes, etc. I view the “claim and invest” approach to our social security as a way to solidify and increase our legacy amount. My analysis was geared toward trying to find the best claiming option with this objective in mind, which of course is quite different than trying to maximize chances of not running out of money in retirement. If the latter were our goal, my wife and I would very likely wait until 70 to claim.
Thank you very much for sharing your especially thoughtful analysis. My situation is similar to yours and I had intuited the same answers. But I ask you this question: Why would you claim at 70 if your goal were to maximize chances of not running out of money in retirement? Would you not still fear means testing (as I do)? Is it your belief that if, owing to some series of disasters, you were to become at risk of running out of money, then Social Security benefits would be there for you? I suppose that might be true at some level, but those benefits might not amount to “maxed-out benefits” (under current law) for a couple. Interested in your thoughts about this.
Thanks for your comment seclawyer. I think our thought processes are very similar.
If not running out of money in retirement (as opposed to maximizing legacy) was our primary goal, the reason I’d be tempted to claim at 70 would be to protect against our worst case scenario. I picture the worst case as my wife and I losing most of our fortune somehow, at which point social security would become a significant part of our retirement income and we would need it to cover retirement expenses. By taking at 70, we would max out our joint monthly social security income, and ultimately the survivor benefit for the surviving spouse. In addition, the claim at 70 income would enjoy larger inflation increases in the future than the claim at 62 option, since the social security COLA would be applied to a larger amount. Under this worst case scenario, I would not worry about means-testing anymore, as the assumption in the worst case scenario is that most of our non-social security income would have vanished when we lost our fortune. And yes, the underlying assumption is that if we lost our fortune somehow, then social security benefits would still be there for us in the future.
Although theoretically possible, I view the worst case scenario as very unlikely to happen. However, before dismissing the claim at 70 option I was careful to ensure that we had other safe retirement income streams, such as our defined benefit pensions, 401Ks, IRAs, etc. By safe I mean that they enjoy various creditor protections under ERISA and state laws, the pensions enjoy PBGC payment protections, and the pension plans bear the investment risks as opposed to us. With these safeguards in place for us, and under the belief that losing our fortune is a remote possibility, then I was comfortable claiming at 62 versus claiming at 70.
Great analysis. My thoughts are to generally take it sooner (closer to 62) if possible for the reasons you mention. Unless you still have a great job that pays well, as well as investments where you dont really need the money that much. You still “win” in this scenario and I’d view SS as extra insurance that will increase some when you decide to claim it later. Another consideration in taking it earlier is that you dont know when you will die. My father passed at 64 after he filed to start his SS payments but never even got one check. Part of me hates to think of paying in all those years and not even collecting at least some of it.
Hi Argo, thanks for you comment and for sharing your thoughts. I think you make a number of good points. If you are still in the process of thinking when to claim for yourself, then best of luck to you!
Thank you for your time and this write up / review. We are both 62 , similar in assets except the 12M portfolio . We have been evaluating our claiming options but not decided.
This will assist when we discuss again over a bottle of wine.
Sincerely.
Thanks for your comments Wapiti19. Um, discussing and deciding your financial future over a bottle of wine may not be the best plan! Then again, if you have a good bottle of wine who really cares about the social security stuff. Best of luck in your decision process.
Thanks for the extensive work which confirms how I’ve been thinking for quite awhile now – just too lazy to put in the effort.
Although we’re a bit younger than you (49), both my wife and I are recently retired. We’re also in the fortunate position of not “needing” SS income and it had always been my plan to claim it as soon as possible. I subscribe the the theory that I can do better with the money than the government (or a pension administrator) so give me my money now.
Hi Mike, thanks for your comments and your gentle letdown (I’d say 49 is a LOT younger than 62!). It sounds like you are a great candidate for a claim and invest type of strategy. You also have the benefit of seeing how potential social security program changes play out before you make a claiming decision. Ah, the advantages of youth! Best of luck to you.
Thanks for this analysis and post. I also really enjoyed your retirement interview.
For many of us with significant net worth, but much less than yours, we will use SS to *improve* our quality life. So we are between the typical American who needs SS to survive/meet basic expenses, and folks like you where you can simply invest it all.
In our case, my simple break even analysis is similar to yours: I’d need to live to about 80 to come out ahead financially by waiting until 70, compared to 62.
But here’s what seems to be missing in almost everything I’ve ever read about this topic: Would I rather have more money to enjoy life between 62 and 80, or wait until after 80 to have it?
I think if SS is most or all of your retirement income, you may really need those extra dollars after 80. But if you’re in a situation like ours (net worth $3.6M), we will have plenty at any age. So the question becomes less about pure math and financial analysis, and more about *when* will I most value having extra money?
I’m 52, so I’ve got some additional time to reflect on this, but right now, we are inclined to take it at 62, really enjoy that period from 62 to 80, and then accept having slightly less in our last years of retirement.
I think the extra dollars argument is a fallacy. If you have substantial savings, you can enjoy the same standard of living if you claim SS at 62 or 70. The difference will be that until your break even age of 80, your net worth will be a little less if you claim SS at 70 than if you claim at 62 since you’ll be drawing more out of your savings, but after age 80 your net worth will be a little higher. Money is fungible, if you get it from Social Security or from your nest egg, makes no difference to your lifestyle.
Of course, if your nest egg is insufficient to delay the SS benefit, claiming at 62 is a no brainer.
I may not understand your point, but here’s what I mean:
In my case prior to age 80 (my break even point) I’d have more total money to spend if I take SS at 62. After age 80, I would have had more money if I wanted until 70.
So you either have more money between 62-80 by taking SS at 62, or you can have more money after age 80, if you wait until 70 to take SS.
I’d rather have more money early than later.
All I am saying is: how much you spend every year is up to you, the total size of your nest egg will depend on when you claim Social Security. You don’t spend your total nest egg every year, unless you are poor.
Technically this is correct but I do think it’s more comforting to spend an earlier SS “annuity stream” vs dipping faster into investments so if it gives you more comfort, take SS earlier. It may not be the best investment if both self and spouse are healthy and expect to live a long time. But like paying off your mortgage early vs keeping it and investing that extra money, you may be happier just having that extra SS money to spend early with less worry.
Thanks Millionaire206 for your kind words. I feel you deserve some sort of merit badge for making it through both my retirement interview and my social security article!
I’ve also enjoyed the spirited exchange between you, MI-169, and Phillip. You all have interesting and valid points, but at the end of the day your claiming decision is about what is best for you. By your own reckoning, you and your wife have achieved a substantial net worth that will be plenty at any age (congratulations on such a great accomplishment by the way!). You’ve already won the retirement game based on net worth alone, so the decision on when to commence your social security benefit is not critical for your ultimate success. It sounds like no matter what path you decide you’ll be fine. As you say you have a long time (a decade) to reflect on it, so you are in great shape! Best of luck to you.
Wow, that was fantastic R26! Thank you for putting in the elbow-grease to not only do the calculations, but put it in writing for us. Much appreciated. Three things:
1) You live in the northeast. Unless you live in Connecticut, you won’t pay State Income tax on S.S. In 2021, 38 states and D.C. will not tax S.S., so readers can search for their own situation.
2) Means testing – thanks for including your analysis and reasoning. I also share your conclusion. The main argument against ‘means testing’ is that it acts as a disincentive for savings and building net worth. The secondary argument is that politicians will never acquire the will to control entitlements, especially one that received by 21% of U.S. population and 46% of voters. I first read about ‘Means testing’ 25 years ago in ‘The Retirement Myth’ by Craig Karpel (1995). The book still holds up.
3) A free, open-source, Social Security calculator might be of interest. opensocialsecurity.com
Thanks again, and continued success to you!
Hello again RI01. You make some great points, particularly about savings disincentives of means testing and the lack of political will to take away existing entitlements.
I would even go a step further. I think means testing would not only provide a disincentive for many people to save, but it would also in essence impose a penalty on those that do. By that I mean that the people who save and invest to build up net worth over time will end up subsidizing the lifestyles of the people who instead fritter all their money away on pleasures of the moment. In the case of my wife and I, over the years we have lived in smaller houses, drove older cars, took less extravagant vacations, and so forth than almost all of our friends and acquaintances. While we aggressively saved and invested to build wealth, others lived high off the hog. Fast forward 30 years and my wife and I now have more wealth (and thus investment income) than these friends and acquaintances. If the government were to institute means testing, they will in essence take away the benefit earned by my wife and I in order to preserve the benefit of our spendthrift friends and acquaintances. My wife and I both view that as fundamentally unfair – a punitive action against the responsible to reward the irresponsible.
Having said that, I understand that there are many other people struggling financially and who have been unable to build wealth through no fault of their own. Perhaps they never had good educational opportunities, or they work in low paying jobs that are still of great benefit to society, or they have suffered illness or injury that has wiped them out, etc. I would have no issue if my social security benefit were taken away to help them. The problem is that it would be difficult if not impossible to distinguish between the spendthrifts and the downtrodden.
Anyway, the future of social security will be a great challenge to politicians who have to struggle with these policy issues. I’m glad I’m not one of them!
Thank you for the well thought out analysis. One of the things keeping my spouse and I from taking social security early is health care. We can manipulate our income to receive significant subsidies under the ACA. What have you and your spouse been doing until Medicare eligible?
Hi Ruth, and thanks for your comments. I am eligible for family medical coverage through a retiree health care policy from my former employer. It is quite expensive, but it provides guaranteed coverage for my wife and I until we become Medicare eligible, and for our daughters until they turn 26. If you care for more details, I talked about this topic in my interview (Retirement Interview 26) recently published on ESI.
Having access to and managing the cost of health insurance is a big concern for every retiree (or at least it should be). It sounds like you and your spouse have put a lot of thought into what path is best for you, so I wish you the best in that regard.
In my own modeling, I forecast pre-tax/pre-inflation returns of 4%. Valuations in the U.S. are very high, and this usually means lower returns going forward. I’m reluctant to allocate more than 1/3 of my stock portfolio outside the U.S. (even though valuations are lower in most other countries) due to weaker corporate governance rules.
But even at a real return of 0% (that is, 4% less taxes and inflation), I’d prefer to have the cash in hand than depend on Congressional mood swings in the future.
Hi David. I share your concerns about equity valuations, and how that tends to dampen returns going forward. I also agree that it is not a bad idea to take the cash in hand now in the form of immediate social security payments, even if the near term prospects for investment returns is not stellar.
In addition to following the conservative investment option with our social security payments, our overall investment portfolio is currently very conservative, with a very high cash allocation.
I took a slightly different approach to analyzing when to start taking Social Security benefit. I am 62, retired, single and also do not need to rely on Social Security due to a small pension and substantial investments. What I did is to calculate the Internal Rate of Return (IRR) required to make claiming at age 62 and age 70 equivalent for various longevities. My annual benefit for claiming at 62 is $27,084, and for claiming at 70 is $47,604 in today’s dollars. For simplicity inflation is assumed to be equal to SS COLA, and thus could be ignored. The following table shows the IRR required to make claiming at age 62 and age 70 equivalent if I live to the age in the second column.
Social Security IRR 62 vs. 70
Year Age Amount IRR
2020 62 (27,084)
2021 63 (27,084)
2022 64 (27,084)
2023 65 (27,084)
2024 66 (27,084)
2025 67 (27,084)
2026 68 (27,084)
2027 69 (27,084)
2028 70 20,520
2029 71 20,520
2030 72 20,520 -22.50%
2031 73 20,520 -15.75%
2032 74 20,520 -11.17%
2033 75 20,520 -7.86%
2034 76 20,520 -5.36%
2035 77 20,520 -3.41%
2036 78 20,520 -1.86%
2037 79 20,520 -0.60%
2038 80 20,520 0.43%
2039 81 20,520 1.29%
2040 82 20,520 2.02%
2041 83 20,520 2.63%
2042 84 20,520 3.16%
2043 85 20,520 3.61%
2044 86 20,520 4.00%
2045 87 20,520 4.34%
2046 88 20,520 4.64%
2047 89 20,520 4.91%
2048 90 20,520 5.14%
2049 91 20,520 5.34%
2050 92 20,520 5.53%
2051 93 20,520 5.69%
2052 94 20,520 5.83%
2053 95 20,520 5.97%
I assume that I claim SS benefit at 70, thus I am “giving up” $27,084 for life, but in return I get additional $20,520 starting age 70. For my case, up to age 80 the IRR is negative, which means that claiming at age 62 is superior. After age 80 IRR starts to go up since the additional $20,520 more than offset the $27,084 I gave up from age 62 to age 70.
The IRRs in the above table are real, to convert them to nominal you need to add inflation. My current projected longevity is 84, so to be indifferent in claiming at 60 or 70 I will need to have a real rate of return of 3.16%, or nominal rate of 5.16%, assuming inflation rate of 2%. If I can earn more than 3.16%, claiming at 62 is better. The question becomes is 3.16% conservative or aggressive? One can make an argument that since Social Security payments are backed by the government, the proper rate of return is the riskless rate, which is currently about negative 1% (real), which makes claiming at 70 superior. On the other hand, if one invests in equities and earns 7%, claiming at 62 is superior, but at a much higher risk level.
To complicate matters further, let’s assume that SS get cut to 75% in 2035. Then the IRR changes to the following:
Social Security IRR 62 vs. 70
Year Age Amount IRR
2020 62 (27,084)
2021 63 (27,084)
2022 64 (27,084)
2023 65 (27,084)
2024 66 (27,084)
2025 67 (27,084)
2026 68 (27,084)
2027 69 (27,084)
2028 70 20,520
2029 71 20,520
2030 72 20,520 -22.50%
2031 73 20,520 -15.75%
2032 74 20,520 -11.17%
2033 75 20,520 -7.86%
2034 76 20,520 -5.36%
2035 77 15,390 -3.85%
2036 78 15,390 -2.58%
2037 79 15,390 -1.50%
2038 80 15,390 -0.59%
2039 81 15,390 0.19%
2040 82 15,390 0.86%
2041 83 15,390 1.44%
2042 84 15,390 1.94%
2043 85 15,390 2.38%
2044 86 15,390 2.76%
2045 87 15,390 3.10%
2046 88 15,390 3.40%
2047 89 15,390 3.67%
2048 90 15,390 3.90%
2049 91 15,390 4.12%
2050 92 15,390 4.31%
2051 93 15,390 4.48%
2052 94 15,390 4.63%
2053 95 15,390 4.77%
At my projected longevity of age 84, the real IRR drops to 1.94%, still substantially above the riskless rate.
At this point I choose to wait to age 70 to file since I will be getting a riskless 3.16% return by doing nothing, assuming I live until 84 and no cuts in benefits.
If I take off my engineering hat, I can look at it this way: if I claim at 70 and live to 95, I win. If I claim at 70 and live to 75 I lose, but I’m dead. If I claim at 62 and live to 95, I lose. If I claim at 62 and live to 75 I win, but I’m dead.
Love your last paragraph! That about sums it up!
Hi MI-169, thanks for sharing your thoughts and analysis. It is an interesting take. It sounds as if you have identified a path that works well for you, so that’s great! Best of luck going forward.
Thank you for this! Was very interesting! I have a question that I’ve been wrestling with, so hopefully your answer gives me some clarity!. While taxes were addressed, one thing that wasn’t mentioned is the additional income from SS and the correlation to increased monthly Medicare costs. Was that a factor in your calculations or was that something that didn’t really impact?
Hi Paulz, thanks for your comments.
My wife and I are 62, so we haven’t quite figured out the whole Medicare thing yet. One thing I do know is that our income from investments, defined benefit pensions, 401K and IRA distributions, etc, is likely to be >$500K per year throughout retirement. Our social security benefits will come on top of this other income. As such, we will be facing high Medicare Part B monthly premiums. I could potentially massage our investments a bit here and there to decrease annual income, but at the end of the day it would not make much of a difference in the Part B monthly premium we’ll have to pay. More fundamentally, I’m not one to let the tax tail wag the investment dog (i.e., minimizing taxable income is a consideration but not my primary goal in investing), so I would not likely make any drastic changes to try to minimize Part B costs or income taxes more broadly.
So bottom line, my analysis did not factor in that higher SS income could drive higher Part B Medicare premiums. I think you bring up a good point that in some cases, optimizing Medicare Part B premiums (and for that matter, income taxes) could be important considerations on when to draw Social Security (or for that matter, when to take distributions from 401Ks, IRA, etc). That is another layer of complexity that I did not have to deal with, so I’m afraid I can’t be of much help there. Good luck!
Thank you for sharing, really enjoyed you walking us through your detailed thought process. Congratulations on your situation, it seems this was just an academic exercise for you, since you seem extremely well positioned overall.
Thanks MI#2. I did spend a few years in academia, so I guess academic exercises are in my blood. In reality, I knew that no matter what claiming decision my wife and I ultimately made, we would be fine. Nevertheless, given all the discussion on claiming strategies in the retirement literature, I was genuinely curious as to what the best path would be for us. Now I know! Our decision would not be right for everybody, but we are confident it was right for us.
Although not the best, here’s a link to an article that also speaks to this topic:
5 Reasons to Claim Social Security Before 65, and 5 Reasons Not To
https://www.fool.com/slideshow/5-reasons-claim-social-security-65-and-5-reasons-not/?slide=2
Thanks for sharing Phillip. The Motley Fool often has an interesting take on things.
This is pretty amazing work – THANKS!
I do wonder if the premise that not needing your Social Security is applicable to these scenarios since money is fungible. Why does it matter if you
Bank and invest your SS but live off the returns of your investment portfolio
or
Spend your SS and let your investment returns re-invest to grow further
In fact since SS is largely taxable it may even be better to spend SS and try to let your investments grow if they are in tax deferred or tax free accounts.
Am I missing something?
Regardless, pretty interesting. I just turned 55 years young and I think Social Security is about as big a riddle as I have before me in the next 10 years (along with Estate Planning and Healthcare Coverage).
Thanks!!
Hi Crusher. No, you are not missing anything. Your analysis is correct.
I frame my story as “claim and invest”, as that is a concept that is well established in the retirement literature and is relatively easy to understand without getting lost in money management or investment mechanics. But yes, if you spend your SS instead of your investments, or you spend your investments rather than your SS, it doesn’t really matter (notwithstanding potential tax optimizations, like the one you mention). As long as you don’t spend them both the net result in the same, as long as an amount equal to your net social security benefit is invested monthly in accordance with the returns assumed by the model. I think the fungibility observation you are making is similar to the point MI-169 made in an earlier post.
In fact, in the case of my wife and I, our Social Security payments are deposited in our checking account and we spend them. Then behind the scenes every month we have an equivalent amount swept out of a money market in one of our brokerage accounts and invested in accordance with the conservative scheme I mentioned in the story (30% equities, 70% short term bonds). The net result is essentially the same as directly investing the SS payments, just easier from a cash management perspective. The key is that our spending doesn’t increase just because we now have money money coming in, but rather we invest the additional money in accordance with the model.
And yes, it would likely be better to spend the SS payments than to liquidate investments in tax deferred or tax free accounts. As I mentioned in my write-up, for ease of modeling my spreadsheet assumed all monthly investment income was taxed immediately, and at our highest marginal rate for ordinary income. To the extent that the investments could enjoy preferential tax treatments (capital gains, qualified dividends, tax free muni bond income, tax-deferred compounding, etc), then yes those investments would perform much better than the investments in my model. If you were to take advantage of these, I believe it would make the “both claim at 62” scenario look even better, since it benefits the most from the compounding of returns over longer periods of time.
Thanks R126. Your analysis is really excellent and has me re-thinking my projected path. It is so helpful that you posted an alternative approach. THANK YOU!!
You’re welcome Crusher. I wish you the best of luck in your financial deliberations!
Did you account for inflation?
Also, with $12m, you should be able to live well on the passive income and investment returns that throw off without ever reducing your principal.
Most people don’t have that option. Claiming early is one way to reduce investment outflows early in retirement, which is really another way of reducing sequence of returns risk.
Hi NoMoW2, let me tackle your points in reverse order.
Yes, my wife and I will be able to live off investments returns from our $12M taxable portfolio, along with our defined benefit pensions and withdrawals from 401Ks and IRAs. In fact, my article was based on the premise that retirement expenses would be completely covered by these sorts of income, and thus social security benefits could be “claimed and invested” rather than “claimed and spent”. For the reasons I stated in my article, my wife and I decided that both of us claiming at 62 would work out best in our particular case.
Please note that in my article, I was not addressing any situations other than the rather narrow “claim and invest” scenario. In other words, I was not trying to make a general argument for claiming early, I was confining my analysis to those in a position to follow a claim and invest path. I realize that this path may not be an option for many people, in which case my article would simply not apply. There are indeed many other situations in which claiming social security early may be the best path, including perhaps the case you mention above. However, I was not trying to address those, as they were outside the scope of my study.
Regarding your inflation question, my model did incorporate a COLA for social security payments, which in essence is based on inflation. My baseline analysis used a COLA of 2%, which is in line with the Fed’s long term inflation target. I also ran sensitivity analysis with higher and lower COLAs, but they did not change the relative performance of the scenarios.
Beyond that, perhaps it would be useful to picture how the spreadsheet worked. What the spreadsheet model computed was the actual projected value of the investment for each scenario for each month in the future. In other words, pretend you had the monthly account statements for the next 35 years each of the scenarios. The bottom line account value on the statement for each month for each scenario is what the spreadsheet was computing. I could have taken these future values and discounted them back to present value using inflation factors, but I chose not to do this. In the end I didn’t really case what the present value of each scenario was, I was only interested in which scenario would provide the biggest pot of gold at the end of my retirement rainbow (i.e., the actual projected future value).
Let me throw a wrinkle into the mix. What about a scenario whereby my spouse is 10 years older than me? I am 53 and he is 63. We both have the same working history and lifetime earnings – he stopped working when he was around 53. Wondering if we should have him claim when he is at FRA (66 & 6 months) or wait until 70. I always thought that it may be best for each of us to wait until age 70 to claim – not so sure given our age difference. Same assumptions as you regarding “Claim & Invest” whereby we would live off our investments until either FRA or 70 would supplement with SS.
Hi Ann. To clarify, the underlying assumption in the “claim and invest” approach is the you would live off investments forever, not just until FRA or 70. The idea is that the SS payments, once invested, would never be touched and continue to compound until both you and your spouse pass away. They then become part of your legacy, and distributed to heirs and charities per your estate plan. It sounds like this may not be what you have in mind, in which case my spreadsheet model would not apply to your case.
That said, if you and your spouse do plan on living off your investments and completely invest your social security payments, then I suspect a spreadsheet model like mine would suggest that your best path would be for you both to claim as early as possible. That would still likely yield the biggest future nest egg in most cases, and would limit your exposure to SS reductions depending on what happens to the SS program in the future. Please note that these are just guesses on my part, and you would have to do your own modeling to verify your best path.
Nice analysis RI26 and write ups.
Here is an alternative computational approach for others that have not yet set up their equivalent spreadsheet. Once your specific situation is set up in the Financial Planner software MaxiFI ™, then the 4 cases of this analysis can be set up and run in about 10 to 15 minutes. And the effect can be seen in your Discretionary Spending overall, or in your Discretionary Spending by Year.
This is quite easy to do and the results are nicely presented in a side by side fashion in 3 ways:
1. On the screen with interactive elements in table and chart view
2. In a PDF fashion you can download
3. In Excel tables that you can download and do further analysis with.
All the other “What-If” analysis can be done in similar ways using Alternate scenarios feature. And note that all taxes (Federal and state) are considered, Medicare Part B premiums (and IRMA if you have greater income), IRAs, Roth IRAs, taxable accounts, rental properties, etc. etc.
MaxiFi costs $139 for first year, and $99 per year for renewal for a one-person license (cloud-based). And if you want to do extensive experimentation, or want to run it to help other family members and friends or even “clients” (up to 100), the professional adviser license costs $500 for first year, and $379 per year for renewal.
I have the Professional License for my own use and find it very worthwhile to run all these types of analyses.
I’m going to see if I can get a discount for Millionaire Money Mentors members. Thanks for pointing me in this direction!
Hi RIX, thanks for the comments. One question – how does MaxiFI handle the compounding of investment returns over time, and well as COLA adjustments for future SS payments? The biggest factor in the relative performance of the scenarios in my model was due to the compounding of investment returns over decades, and the increases in future payments due to inflation (i.e., COLA adjustments) was also an important factor.
Hi RI26:
Inflation rates have a default value which determines SS COLAs and discounting all results in the software to show Today’s Values (inflation-adjusted) dollars. This default value is updated by Prof. Kotlikoff every 6 months. But you can override this value and put any inflation rate you want and then further define a change in inflation to a different % in a future year you input. So very flexible.
Investment returns overtime are fully accounted for in both a deterministic mode (spreadsheet type mode) and in a Monte Carlo mode. There is cashflow accounting for all the different types of accounts (taxable, IRA/401K, Roth IRA, etc.) with investment return (adjustable by accounts) and all taxes calculated every year. So investment returns are compounded over time.
If you contact ESI and join the millionairemoneymentors forum as a mentor (Free!) then I can share screen shots ( a picture (JPEG) is worth a 1000 words” 🙂 )from MaxiFi which show the flexibility of this software.
Hope this helps, RIX
Sounds great RIX. Thanks for bringing this to everyone’s attention. Probably beats spreadsheet modeling by a mile!
I really enjoyed your take and perspective on this topic. You’re right: so many people encourage others to wait and take SS at age 70… but I really like how you throw in the idea that if you don’t necessarily need the SS money, it might actually make sense to invest and file at age 62.
Unfortunately, I know I have a lot of time until I can file for SS, since I’m still a millennial – and who knows how our SS picture will look at that point.
Thanks for sharing the insight!
Thanks for your comments Millennial Money Woman. It’s very impressive that you are already studying topics like SS, even though your own claiming decision will be decades away. Your advance preparation and study of financial planning topics will serve you very well in life. Best of luck in your future.
Really enjoyed your detailed analysis. Thanks for taking the time to do this.
You’re welcome MI227. Thanks for your kind comment.
This was just excellent. Thoughts like this really open people’s minds and helps them think outside the box. Thanks for taking the time to write out all your thoughts. It helps other people learn.
Thanks for the kind words Andrea.
Such a great post! I struggle with this (although prematurely). I’m a young (ish) widow and can collect beginning at 60. I’m currently 52. It’s difficult to find a calculator to allow for beginning SS at 60 and I’m definitely not a math person! This was a helpful to me as I can see how claiming early and banking as much of that as I can might be a good option for me. Thanks again!
Hi DH68, thanks for your comments. Since you’re only 52, you will have the advantage of getting to see how things play out over the next 10 years before you need to make a decision. Best of luck to you.
I mocked up the scenario you describe and got different results for the numbers the SSA has reported to me for my age 62, 67, & 70 draw amounts. I am trying to figure out what would be different and I am wondering if perhaps you didn’t increase the expected payments at age 67 and 70 based on the COLA. If I don’t do that then I can get results pretty similar to yours. But those payments that are reported by the SSA at age 67 and 70 won’t be what your payments actually are at that age because they will have been increase by the COLA.
For instance if your statement says that you are going to get $2000 if you draw at age 62 and $3000 if you draw at age 67 you are never actually going to draw the $3000 number. After a 2% COLA the number you would start drawing at age 67 in that scenario would be $3312. That difference changes the results drastically.
For my reported SS numbers at 3% returns I cross the break even point in invested account balance at age 81 which is about 4 years later than no return. At 5% return it was age 83 and at 7.5% return it was at age 90.
Since my wife will be drawing off of my spousal benefit waiting until age 70 would perform terrible for her so that isn’t even worth considering. Drawing early for her would also perform considerably worse because of the drastic reduction in spousal benefit capped at 32.5% of my FRA instead of 50%. For her off of my spousal benefit a 3% invested return has a breakeven at age 76. At 5% return the break even is age 78 and at 7.5% return the break even is age 82.
I was quite intrigued by this analysis so I wanted to test run it myself, but when I run my own numbers it seems to me that FRA still probably wins and with one person using the spousal benefit it then becomes the hands down winner. I think for most people that is probably going to be the case.
Obviously if you die before your mid 70s then drawing early always wins and if you live to be 100 then drawing at 70 probably always wins.
I have felt FRA was probably best for quite a while and running this analysis seems to confirm that for me.
Hi Apex, thanks for your comments. I did adjust the payments at 67 and 70 based on COLA. I’m not sure where the discrepancies occur; there are many other factors at play such as taxes, etc, so maybe there was a difference somewhere in there. Or it is always possible I made an error somewhere in my modeling.
In any event, I would encourage everyone to run and rely on their own modeling, as you have done. If your modeling indicates that FRA is the best option for you, then perhaps that is the way to go provided that longevity factors, your analysis of social security reforms (e.g., you are not concerned about means-testing, etc), and so forth point toward the same answer.
I think it is also worth pointing out, as has been mentioned in several other comments, that the model only produces a theoretical average case anyway. Real world factors such as sequence of returns, tax optimizations, etc., will have a big impact on the actual balance at any age, and this was way beyond my spreadsheet modeling exercise. It may be that more robust modeling could be done with the MaxiFi software mentioned in a previous comment, or some other tool.
Anyway, best of luck in your decision process.
Thanks for that response. I am at a loss then as to why the results looked different for me. I could have made a mistake too. I tried to look for one and didn’t see anything obvious, but I just built it today too so it hasn’t exactly been well tested.
I do think you have a unique situation where you don’t need to use a spousal benefit. That does change the calculation which makes it hard to draw early and take such a reduction of the spousal benefit.
Another thing in general I noticed is the following, and it holds for both the conservative and aggressive investing approaches. As you observed, there will be some some extreme cases (i.e., where people die very early or live very long), in which one strategy or another will be an overwhelming winner. For the rest of the cases in the middle, the differences between the claiming scenarios (i.e., in terms of the accrued balance for any given month) is usually not that large – maybe a max of 10% to 15%, and usually much less. As such, whichever claiming scenario you choose will likely work out pretty well, so there’s no need to fret too much over the model. There can be other factors at play as well, such as maximizing the survivor benefit if that is a concern.
Quite frankly, the real difference is not be between claim early vs claim late, but between the conservative and aggressive investment approaches. Due to compounding, over a long investment horizon the aggressive approach will produce a much bigger nest egg than the conservative approach. But of course, people need to take into account risk tolerance, valuations, etc., to decide which investment approach may be best for them.
Good point. The choices are designed to be actuarially equivalent. In that sense the decision isn’t that weighty.
I actually think the people for whom it is truly weighty are those of meager means. They are not going to be saving their money since they need it desperately. Anything they can do to delay when they draw will have a very meaningful impact on the rest of their lives.
Any choice we make will almost certainly be indistinguishable in our lives.
Tue, October 20, 2020, 6:00 PM EDT
A recent Bipartisan Policy Center analysis of Social Security’s solvency found “COVID-19 could deplete reserves in each of the Social Security trust funds before the end of this decade, much sooner than previously forecasted.”
“We need a proposal to really restore financial solvency to Social Security over the long run,” says Munnell, who served on the President’s Council of Economic Advisers and was an Assistant Secretary of the Treasury for Economic Policy during the Clinton administration.
The Social Security Administration will pay more than $1 trillion in benefits to 65 million Americans this year. But the analysis shows benefits, in 2029, will fall 24% with Social Security only able to pay recipients 76 cents on the dollar. According to Munnell, Social Security can only avoid the drop in benefits with big cuts or additional taxpayer funding.
https://www.yahoo.com/finance/news/how-bidens-tax-hike-and-social-security-fix-falls-short-220051237.html
Great Article. I came to the same conclusion in chapter 7 of my Retirement Book. In fact I stated that if you get an average return of 8%, then no one since Noah has lived long enough to catchup if you wait until age 70 to take the higher income. Noah died at age 950. If you retired early and you don’t need social security, then taking the lower benefits at age 62 and leaving your retirement funds invested is the clear winner. I’m going to add this to Fawcett’s Favorites for Monday.
Dr. Cory S. Fawcett
Financial Success MD
I have been debating taking at FRA (comes in a few months for me) vs. waiting until 70. The standard “wait if you can” advice didn’t compute for me….but your excellent analysis helped a great deal. I’m starting at FRA.
Very nicely done, my friend.
My wife is older than me by 2 years and earned much less in her career. As such, once I file at age 63, she can file and receive the spousal benefit of 50% of my FRA benefit, which equates to an additional $500 per month for her and nearly offset the amount I would receive by waiting to 66 and 8 months. From my perspective, this is an added incentive to apply early and begin receiving the payments.
Thoughts?