When to Take Social Security

We've talked a lot about when to take Social Security payments -- either early or on time -- including the following posts:

• Social Security Calculator Can Help Tell When to Take Benefits

• More Thoughts on When to Take Social Security

• When Should You Take Your Social Security Retirement?

So I thought it was appropriate to let the people from Vanguard weigh in with their thoughts on when to take Social Security. As with most articles on this subject, Vanguard's thoughts start with whether or not you need it right away:

"If you have sufficient assets so that you have no immediate need for Social Security income, then it may be best to delay taking the benefit," he said.

However, if you don't have enough money to meet your current spending needs, you should feel free to take Social Security as soon as possible, Mr. Ameriks added.

And, of course, how long you live has a BIG impact on which is the better choice:

If you expect to live a long time past age 80—or if you're just concerned about the risk of outliving your assets—you might consider delaying benefits until age 70, to boost your future monthly payments. If not, you may want to start collecting benefits at age 62. Although your monthly payments will be reduced, the lifetime amount you receive may be higher because you started taking benefits sooner.

But since no one knows how long they'll live, this is a bit of a guess.

Here's what I am doing/plan to do:

1. I'm saving for retirement assuming I won't get a penny from Social Security. Who knows, maybe I will, maybe I won't. If I do get anything, it will be a windfall since I'm counting on nothing.

2. I'll wait as late as possible to take Social Security. If anything, I'll use it as a last-chance safety net in case my retirement savings get low.

What about you? What do you plan to do?

Comments

[JM]

wouldn't taking it @ 62 allow you to leave more of your real retirement money in the bank longer and thus it would last longer and earn potentially more interest through compounding?

Also, if your retirement is planned to not rely on SS, shouldn't you by definition not need SS at all, therefore your question is really "Should I take the extra money I don't necessarily need early, or wait and get a little more extra money that I don't necc. need later?". I would take the extra money earlier, probably because I can't possibly know my date of death, so I would rather live it up while I could enjoy it (assuming my retirement is well planned 30 years in advance).

[Jon]

My plan is very similar to yours. I am fairly young, and I don't see SS being around by the time I am 65 or 70. I am making my retirement plans based on the assumption that I will have to fund it all myself. If it is there, then I will take it on schedule and most likely just save it away myself, even if it is just in a high yield savings account.

[Lord]

For the very wealthy, it may be advantageous to delay it for tax reasons, although doing anything for tax reasons is usually a bad idea. In part it depends on the form of your assets and income. A private account will generally outperform SS so you are better off taking it early while a life annuity will depreciate over time if not indexed so delaying it may make some sense. Couples may wish to take one early and one late to diversify their collection. Most will be best served taking it soon after ceasing work though.

[Mr Credit Card]

It's always best to plan for the scenario whereby there is no social security. However, I think it is unrealistic to even think about what to do with regards to making use of your social security. This is because you will never really know until you are close to retirement.

[EMF]

If you follow the 4% rule-of-thumb for withdrawal of retirement savings, then your initial draw is $3.33 per month for every $1000 of savings, and you adjust it for inflation annually thereafter. This rule-of-thumb is supposed to give your a 95% confidence level of not going broke within 30 years, assuming an appropriate investment. There's a possibility you'll live longer than 30 years, the younger you are at retirement the higher the possibility (unless of course you have a terminal condition when you retire).

If you delay taking Social Security benefits from age 66 to age 67, then you replace the benefit for that year from your retirement savings. But the increased benefits when you take them more than $6.00 per month for every $1000 of benefits you deferred (for someone born in 1943 through 1954). Social Security benefits are also adjusted for inflation, which I believe is commonly ignored by people who advocate taking benefits early and investing them. The assumption in this is that the government will pay the benefits as promised under current law.

One trade-off between the two approaches is that if you die early then you'll leave less money to your heirs by delaying Social Security benefits. But if you live longer then there's less chance of your needing to depend on them.

I have more numbers and details on this in a post on my blog, which is linked below. Lord, my blog article discusses lifetime annuities which are indexed for inflation, for comparison purposes.

[Lord]

SS is invested in treasuries. If you invest in equities, you will almost certainly stand to do better. It doesn't get much simpler than that. If you work and contribute more, you will receive more, but for a shorter length of time. Always, always work with real returns and present dollars. Anything else is misleading.

[EMF]

Lord --
You are quite wrong. Social Security is not invested in treasuries, it is invested in the ability of the working population to support the retired population. The Social Security trust fund is just so many deck chairs being rearranged -- current benefits are paid from current receipts or borrowing. Your SS benefits are not determined by how well treasuries do, they're determined by the laws that determine how benefits are computed. Whether or not the government will go even deeper in debt to maintain current-law SS payments to boomers with the upcoming demographic changes remains to be seen. Will taxes increase, or will benefits decrease? Certainly more difficult than it would have been if King George II hadn't reversed course from bringing down the debt to instead adding to it. Being reset in my retirement savings by a divorce leads me to cross my fingers and hope Social Security will at least partially be there to help out. In the mean time, I'm living well beneath my means to be in a better position to get by without Social inSecurity if need be.

No, you are not certain to do better on equities. Take someone who retired in late 1999 with all their savings in equities. How are they doing? Over the long run, equities perform well, but there have been shorter periods where equities haven't done well. And retirement is not a long enough period to withstand a down market while you're withdrawing a high percentage of your savings.

What are you calling "real returns"? Is this returns before inflation, or after inflation? And is it long term or short term? Would be interested in some facts to back up your certainties and generalities.

[Susan]

I plan to utilize all resources made available to me at age 62. No one is given a guarantee about anything and even though returns on investments probably will continue, I'm not banking on anything except to continue to save and live below my means until I die. That doesn't mean that I don't have fun or enjoy life, I've just learned to appreciate the "less is more" philosophy. And to quote Sheryl Crow's line in her song, "it's not having what you want, it's wanting what you've got." That's all.

[Lord]

I didn't say for certain. A retirement of 20 years is still long enough for a sizable amount of equities. SS is like a large amount of TIPS allowing for a greater amount of equities in the rest of your portfolio. You need 60% equities simply to provide for a 4% safe rate. If SS amounted to 40% of your portfolio, all your other funds should be in equities.

SS provides the same benefits to someone who lives an average life expectancy. It is that way by design. If your calculations are telling you something different, they are in error. Absent additional information, it doesn't matter when you take it. Some other things to keep in mind are if you retire during a recession you may be better off taking it early to minimize portfolio distributions. If you retire when real wages are increasing you may be better off delaying to boost the wage price adjustment although that would be small. I personally do not expect greater than average life expectancy, so delaying it makes no sense for me. For all those planning to live past 100, great, you won't, but it will just mean SS will be more secure for me.

[Lord]

Another consideration is the retired spend less over the course of their retirement, and apparently not by financial necessity, but due to diminishing interests, ability to travel, age, loss. This suggests frontloading your spending may be better.

[Lord]

I think your misconception may be that delaying benefits for a year increases them by 8% is the equivalent of getting an 8% return on your money. Far from it. It means you have a year less to collect them and have forgone a year at the lower rate. In as far as you have a median life expectancy, you have gained zip. I will try to dig out some calculations I did a while back.

[EMF]

Lord, Lord, Lord.

Lord!!! What does 20 years have to do with it? Even if you retire as late as the age of 70, the average person has a greater than 37% chance of living past the age of 90. Would you want to take a 37% risk of having to eat cat food by only planning to live 20 years and being unlucky enough to live longer? Maybe someone will take over for Dr. Kevorkian and you can visit him for treatment.

No, SS is not like TIPS. If you save enough in TIPS to cover expenses for an average life expectancy and then live longer than average, you eat cat food (if you can afford it) after you've spent down your savings in TIPS. On SS, if you live longer than average you still get it. Do YOU get it now? If not, re-read this comment and my earlier comments again.

I made no statement about someone who lives an average life expectancy. But how many people really live an average life expectancy? Given a spread of a year, less than 5%. Of the remaining 95%, around 48% live longer than average and around 47% live less than average (give or take a few percentage points).

You show a lack of understanding as to how SS benefits are calculated. Wage indexing stops at age 62 (with a 2 year delay), and inflation rate adjusting takes over thereafter. This is true regardless of what age you actually start benefits.

And if you'll take the time to re-read my point about delaying SS and take the time to understand it, you'll see that I did not mention an 8% figure anywhere. And that I did account for the year of lost benefits at the lower rate against the resulting rate of higher benefit. What I presented was the dollar amount of increased benefit Vs the dollar amount of benefit given up by waiting a year.

With respect to your point about spending decreasing with age, I'll agree from my own observations that this seems plausible, on average. But only up to the point where declining health leads to increased health care and/or nursing home expenses. Then your spending rate may overshadow the years when you were an active retiree.

No, I don't have any misconceptions on this issue. At least none that you have exposed. What you have exposed is your own misconceptions and willingness to throw out unsupported generalizations. If you're going to criticize what I've presented, make sure you understand what I've presented and give it some thought. And show some real numbers.

[Lord]

EMF
I have better things to do with my time than a flame war. Just to clarify some points which you seem unable to understand, 20 years is the median life expectancy at 65. Certainly at 70 it is longer but less than 20. Some people have to take it early. How many people live longer than average? Half. How many less? Half. Those that live less are harmed by delaying SS. So far we have a majority. No ifs, ands, or buts.

Yes, SS is like the income stream from TIPS. It is protected from inflation but provides no growth. Stop putting words into my mouth about retiring on TIPS. How idiotic. Something like retirees should avoid equities.

If you really want to discuss this with experts, I suggest http://early-retirement.org/forums/ . That is all you will hear from me on this as you have no ability to form a coherent argument and I am not interested uncovering the flaws in your calculations.

[EMF]

I find it quite ironic that Lord states that I "have no ability to form a coherent argument". I guess instead of simply stating that Social Security benefits are indexed for inflation, I should learn to say that "SS is like a large amount of TIPS."

I'm still puzzling over:
"Just to clarify some points which you seem unable to understand, 20 years is the median life expectancy at 65. Certainly at 70 it is longer but less than 20".
Somehow at 70 life expectancy is both longer than 20 but less than 20? So less is longer? Hmmm.

And I'm trying to wrap my head around 1/2 being a majority.

For the rest of you who might be interested in exposing the flaws in my calculations, I have an example in a post on my blog. The link "EMF" below will take you to it.

[SDStormrider]

I plan on taking SS at 62 (earliest possible), for me that's nearly 30 years from now. I believe we will all get something from SS, perhaps far less than what the govt tells us, but as long as workers are paying the tax, there will be some to give out. I started paying this damn tax at 16, Im tapping it ASAP.

[Joe]

There is a bigger problem with SS than most people understand. As noted above, SS is paid from the taxes coming in, not Treasuries or other investments. Projections already show that by around 2017 THE AMOUNT TAKEN IN FROM TAXES WILL BE LESS THAN PAID OUT IN BENEFITS. Everyone keeps saying there is enough in SS to last until 2038 or something, but that includes all those IOUs from the government. Remember the Gore "lockbox" proposal? Well, without a lockbox for the surplus money coming in from SS taxes and with those dollars spent on other government programs every year, in 2017 the taxes will have to go up, or benefits will come down. This is not a 30 year problem anymore. We will see this as a much bigger issue very soon.