I was interested in this discussion, and went looking around the internet for a chart that shows the tradeoff between taking SS at 62 vs 70, and couldn’t find one. So using my own SSA statement from this February, I made a spreadsheet based on what age I took SS versus my death, and came up with this:
The sweet spot looks to be 82ish: if you die then, everybody gets about the same.
I wouldn’t look at the dollar amounts too closely: this is based on my own SS credits which is maxed because I was a high earner, but a lower earner would get the same graph overall at a lower amount. The graph is in constant dollars, which seems correct to me if you’re comparing over 30 years and trying to visualize.
Credit to my friend Sydney, who is way better at Excel graphs than me. I can publish the underlying data if that helps.
I think it was based on unisex life expectancy at 65? The average person with an average projected remaining life expectancy theoretically gets the same total benefit out whenever they start.
On that basis alone given an individual of a demographic with longer remaining life expectancy than average (for instance white well educated female higher SES in good health) will on average get more out of the system waiting until 70 than taking earlier, and those of lower remaining life expectancy (for example Black less highly educated male lower SES and/or poorer health) will get more out taking it earlier.
Or so I understand.
But that doesn’t factor the opportunity cost issue.
You clearly have the basics. In a nutshell, the break evenpoint for SS is generally between 81 and 83. In theory that’s your life expectancy. But then you have to throw in all of the variables:
- Your projected quality of life in your 60s, 70s, 80s and beyond. If you knew you’d be active and enjoying the hell out of life in your 90s it makes sense to wait. If you’re worn out physically in your 60s, it makes sense to take it sooner.
- What is your health. Do you think you’ll live until 82? As I wrote previously, by wife will forgo ~$212,000 from age 62 to 70 if she waits. That’s a lot of vacations, gifts to kids and grandchildren, charity donations savings and the like. And God forbit she dies at 69 there’s nothing.
- Spouses age and health. If your spouse is markedly younger and will get much less than you, she/he might want your SS someday, and you’d likely want that to be a high as possible.
- Do you want to leave money to family, charity, etc. As has been noted, you can’t leave future SS in your will.
As I stated up tread, I get frustrated by virtually all articles on the subject that say the most intelligent thing to do is wait until 70 to maximize one’s SS. That’s not always the case and not universally the best plan.
For me, seeing that sort of advice automatically told me the advisor was not credible and was to be ignored. It sure cut down on the number of articles on the topic that I reviewed when trying to figure out my best strategy.
Well there’s the biggest sticking point of course. We never know.
I can make an actuarial best guess. Male is the only strike against me on relative mortality rate. White, well educated, upper SES, married, non-smoker, near lowest risk BMI, low resting heart rate, regular aerobic exercise and strength training, decent nutrition habits, heck even my short stature … statistically I have good odds. But I could be hit by a car while riding my bike tomorrow or suddenly discover I have metastatic melanoma. Things change unpredictably.
So what values we place on the risk of each possible outcome matter as well. It’s still math but deciding what numbers to enter for those values is not something most of us are skilled at. I know I’m not. My gut, as above, is to value the possibility of leaving a bigger inheritance less than risking being more worried about money if I live exceptionally long.
Am I wrong to consider delaying taking benefits as similar to investing in an annuity with part of my retirement portfolio? But one that lumps me actuarially with higher mortality risk demographics?
I’d love to find an annuity with the guaranteed growth rate of SS from 62 to 70, inflation adjusted.
I have a question for you - how much money are your investments generating? That’s interest and dividends, with some part growth with the market. Pre-retirement we’ve been trained to build your investment base before everything, reinvesting interest and dividends. That doesn’t necessarily make sense after retirement.
I moved my investments into funds which are less volatile and pay good returns. They didn’t go up as fast as the market, but they didn’t fall as fast as the market either. But it depends on how much you have in your portfolio.
While the opportunity cost of taking Social Security at age 62 versus 70 is relatively simple to model, it’s less easy to model the effect additional years of earnings will have on your basic amount. My earnings won’t change much with each year of additional earnings; my husband’s will, though only by 100 bucks a month or so.
I plugged my benefit into a spreadsheet to see total money received if I took SS right now, versus if I waited until 70. I made the assumption that what shows now as my FRA benefit will be adjusted upward based on interim COLA increases, and I assumed that was 3 percent per year. I also assumed that future years would also grow by 3%.
Adding up the monthly income, it would be about 11 years before I’ve gotten more money by waiting until FRA to collect versus collecting tomorrow. It would be about 14 or so years by waiting until age 70 versus collecting today.
And, while I’m collecting Social Security, that’s so much less of our IRAs etc. that we’d need to access, allowing those to grow more (or at least shrink less).
So I’ve just about convinced myself to start drawing down SS as soon as I am no longer employed!
They’ve closed that loophole - my brother (who turns 70 in a few weeks) was able to use this. If he’d been born a year later, he could not have - and I cannot.
As I think someone noted, another factor will be what the spouse’s earnings history might be, compared with your own. If their benefit is lower than half of yours, they’ll be getting half of your amount, and I think after you die, the spouse gets the full amount of your benefit instead. It’s an incentive for you to continue to work as long as possible. Whether to take SS as soon as possible would depend on whether you have other savings.
Exactly as far as the annuity comparison goes. Roughing it out I’d be deferring something like $110-115 K between 67 and 70 to “buy” an additional inflation adjusted net 11K per year of lifetime annuity from 70 on. How does that compare to commercial annuity products?
Still pre-retirement, turning 64, and only recently reached the point to consider retirement as an imaginable future likely by 70, maybe before, so still in that pre mindset. Been fairly heavy weighted to stock funds over the usual age advised allocations. Which is to say money generated including growth (and loss) depends greatly on time period!
While I get cash flow matters in retirement I’m not yet convinced that very heavy income focus will make sense so long as I can still mostly weather economic storms. I suspect I will become convinced after we meet with a planner. But that’s likely a different thread.
If you have enough cash flow coming in, you can weather downturns by adopting the Dan Ariely Great Recession investment strategy of never opening your account statements. (As heard on Marketplace.)
Good point - but you do have to offset that growth by the loss in income from your other investments - which, presumably, you are drawing down in order to not need the SS income.
Modelling something like that is beyond my “I’m avoiding work, so I’m playing with Excel” skills. I’m sure there are financial analysts who have indeed done such a model.
I was just comparing “investing” in not taking SS early with an annuity. You’d have to take money from your investments to buy one after all. I converted a pension that was worth more than I thought to an annuity, and I’m not sure I’d do it again. I haven’t drawn on it at all, at this point it will be useful as life insurance only.
If cash flow from investments + Social Security is more than you need to live on, you can draw down investments only if you have a big expense, like a new car. While you have to take money out of IRAs at 72 and mumble, you can put it in a Roth. The big difference in viewpoint after retirement is that you stop worrying about balance and only worry if you can generate the cash to live on.
Now I was lucky in that when I did sell some stuff waiting for 70 it was into a nice bull market.
The most useful piece of analysis I got when thinking about retirement was a Monte Carlo simulation which. given your investment level and expected expenditures, gave you probabilities of having various amounts of money left based on a wide range of possible market conditions. That’s something Excel can’t do. If it shows that you have say a 75% chance of having lots of money at 95 you can mostly stop worrying. It’s the only model I’ve seen that doesn’t assume any particular economy for the next 30 years.
So cash flow I need, assuming I’ve adequately modeled the future, is met by return on my portfolio. If the only portion of return I care about is income (eg dividends and interest, maybe rent) then my portfolio to start has to be more sizable than one that is also going to, over time, also grow (ideally somewhat noncorrelated classes), and produce some of my cash flow through capital gains. Yes?
I have no kids and only one nephew and one niece (and one grand nephew), so I really don’t have to worry about leaving anything behind. Both kids are doing well in good careers. But odds are I’ll be leaving them a decent inheritance. As I’ve mentioned elsewhere I currently have more money in my retirement fund now than I did when I retired 10 years ago.
The standard advice is to expect to cash in some of your portfolio, a certain percentage each year, with the goal of not leaving too much behind. That is easier if your portfolio goes up, a bit harder if it goes down. It also assumes a lifespan.
But the real change in attitude is that pre-retirement you want to be reasonably aggressive, like index funds, since income just gets taxed. Post-retirement you can concentrate on returns. So the same amount of money redirected into other investments can improve your cash flow even if it doesn’t maximize your portfolio value.
I probably pay too much for financial advice, but that advice from my planner has been worth every penny I pay him.
When you say “through capital gains”, do you mean “from selling off some of the assets”?
Yes, if you plan to live on the income without touching the principal (i.e. selling some of the assets), you need a larger base. Also depending on how you have the investments structured, income will vary, possibly a LOT, depending on the markets and interest rates.
I’ve read that there’s a general rule of thumb for accessing one’s IRA/401(k): you plan on drawing down approximately 4% of the value each year. If the market is up, you can take a smaller percent, or take the 4% and just have more cash on hand. If the market has been doing well, it might grow faster than your drawdown, also. That 4% was suggested based on historical returns over the long run, and one article I read suggested that performance in the next few years may not be as high as historical returns have been.
I ran a report in Quicken just now, where we have almost all our transaction history, and our overall rate of return since 2010 is a bit under 6%. Interestingly, the major downturns (2018, 2021) have been immediately followed by huge gains. This is why I don’t follow the markets too closely - it would drive me wild with worry. I just close my eyes, grit my teeth, and continue contributing and trusting to dollar-cost averaging.
Let’s say you start with a $2.5 million portfolio. In your first year of retirement, you can withdraw 4% of your total balance or $100,000.
That sets your baseline. Each year thereafter, the withdrawal amount increases with the inflation rate. If inflation is 2% in year two, you withdraw $102,000.
And yes, a report from Morningstar a few years ago suggested 3.3% might be a better withdrawal policy going forward. But they’ve kind of flipped on that:
In 2021, Morningstar, a financial services company, published a research paper calling the 4% rule “no longer feasible,” proposing a 3.3% withdrawal rate would be more realistic. But in December 2022, those same researchers updated their rate to 3.8%.
It appears reports of the rule’s death may have been greatly exaggerated.
His calcs are for the money to run out when I’m 100ish and taking social security at 62. It also takes my typical spending into account with the occasional big expense from a nice vacation to the kitchen remodel.
