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June 19, 2007


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I went through this calculation and determined that for me, it is best to take the money earlier. Even at a low return on the money, the additional income earned by waiting never overcomes the power of compounding.

The same is true with my pension.

If I take the money at age 55, I get about 24% of the money I get if I take it at age 70. If I get a modest 8% return on the money, the break-even point is age 85. At 9%, it is age 91. And, at 10%, there is no break-even point.


But if you're already in retirement, will you be putting the money in higher-risk investments that can earn 8-10%? Perhaps some will be in stocks, but you'll probably be keeping the principal safe to a certain degree as well. So you may want to see what it looks like at lower levels- say 5 or 6%, which is what half bonds/cash and half stocks may give you.

Still, this is one of those fun situations where you are betting on your own death. Personally it seems better to assume you'll live a long time. If you're wrong, then you won't be around to see what you missed out on anyway. :-)

Using the 11% rule, for every $100 taken at age 62, you could have a more impressive $230.45. Then the break even points are age 82.5 for 8%, 85.5 for 9% and 91 for 10%. You could argue that these are low enough to justify taking the money early or that insuring against inflation is a good idea. I'd rather take the money and invest it. After all, I plan on this being supplemental income.

I suppose delaying payment is better if you plan on this beign your only income.... or if you expect to live till 100.

Dear FMF,
Great job doing the math and getting comments about this often misunderstood topic!

I would take the money as soon as possible, they can always reduce your value through political means but money you have already taken would be hard for them to come after. I don't even expect it to be there so when I turn the right age, I am going to snap it up.

The flaws in this article are so severe it needs a big caution around it, reading it may be hazardous to your financial health.

First, the 8% 'rule' applies only if you continue to work and contribute to SS. What you are actually doing is shortening your retirement life. If you are are not working, the actual discount rates are 4% real for early retirement and 2% real for late retirement. If you can't beat those you have worse problems than you imagine. If you anticipate a long life expectancy, much longer than 85, then delaying it may make sense, but how many 85+ people do you know traveling the world? Having more to spend on healthcare seems like a twisted set of values to me.

Here's a question on when to begin taking social security benefits. Let's say I'm 61 years old and my wife is 58 years old (three years younger). Let's also say that I have worked for more than 30 years and will be entitied to a relatively high amount of social security benefits, while my wife has worked for about 15 years, at a lower salary and will be entitled to a relatively small amount of social security benefits.

Could I decide to delay the receipt of my social security benefits until my full retirement age or until age 70 but have my wife begin collecting her small benefits when she turns 62? If we choose to do this, would she still be entitied to 50 percent of my benefit when I begin collecting social security at my full retirement age or at age 70?

Is this a strategy we could use? If so, as a couple we would receive a small payment from the time my wife turns 62 until the time I reach my full retirement age or age 70. We would also, as a couple, receive a relatively high payment when I begin collecting my benefits.

Personally I'll delay to 70, but longevity runs in the family. My Great-Grandma is 99 and still kicking, grandma is 79 and dad is 78. My other grandma live to 95. I think I have a good shot of living a long time.

But to other people? Maybe they should take it earlier. They don't have longevity on their side.

As I slept on this overnight, I wondered -- my normal retirement age is 2032 -- will their even be SS by then?

Even with a modest return on investment (say 5%), there is never a break even point for delaying your earnings. That is to say, you can never earn as much if you delay. The author's number are just way off. But I am assuming of course that you have the discipline to not spend any of your earnings until the equivalent of when you would have delayed until. To make this perfectly clear: YOU CAN MAKE THE MOST BY TAKING IT EARLY. (caveat: every situation is different, just don't let these guys bully you into retiring late)

Here is an example. Fact: for every $1,000 you would earn at age 67, you earn $715 at age 60. That's based off the SSA reduced retirement rate. Then assuming you will earn $1,000 at 67 (the numbers scale, so if you would have earned $1,100 or whatever the basic results are the same) it follows that: Net Worth at 61 (NW61) = $715 * 12 = $8580. Using simple annual compounded interest at 5%, NW62 = NW61 * 1.05 + ($715 * 12) = $8580 * 1.05 + $8580 = $17,589. Using the same formula, NW63 = $17,589 * 1.05 + $8580 = $27,048. NW64 = NW63 * 1.05 + $8580 = $36,980. NW65 = $36,980 * 1.05 + $8580 = $47,409. NW66 = 47,409 * 1.05 + $8580 = $58,360. NW67 = $58,360 * 1.05 + $8580 = $69,858.

It was painful to write that, but hopefully I've spelled it out so that everyone can follow that the person who takes the money at age 60 basically has $70,000 in the bank at age 67. Now with $70,000 in the bank that person makes ($70,000 * 0.05) / 12 = $291 per month in interest. Add that to the $715 the person is getting from SS and by my calculations that is more than the $1,000 you would get for waiting until age 67. That is to say, living off interest and reduced SS, you will make more that you would by waiting. NOT TO MENTION THE $70,000 IN THE BANK.

Oh alright. I didn't account for inflation. (I'm still not entirely sure that the $715 to $1,000 comparison at the SSA site doesn't take inflation into account, but I'm no expert). But with 3% inflation over 7 years this only amounts to 23% total inflation (1.03^7). So at most that would give the guy who held out until age 67 a ($1,000 * 1.23) - ($715 + $291) = $224 monthly advantage or $2688 yearly advantage. In this case, the break even point would be defined as 67 (his current age) plus [$70,000 (all the money the other guy has in the bank) divided by $2688 (the yearly advantage)] = 67 + ($70,000 / $2688) = age 93.

Now not everyone is going to save all the money, and of course if you work an extra 7 years you are going to make 7 more years of money. But point is, it is not such a nice cut and dry equation as some of these pundits would have you believe. Don't feel bad about taking the money early, and don't feel superior because you can hold out. Fact of the matter is the equation is different for every story. In my case, I'll be saving most of it due to other pensions, and I doubt I'll live to see 93. But even if I see a hundred, I'll only be down less than $20,000 from having waited it out. And according to current mortality rates odds are I won't even see 80.

Just food for thought

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