And there is another, even more variable, “value” to this money - the happiness it will provide you.
A slightly larger SS check when you are in your 90’s may provide a slightly better nursing home experience. It might be the difference between a pleasant final few years and pretty lousy ones.
A SS check in your late 60’s might let you take a trip somewhere you couldn’t afford to go, and won’t be able to go 5 years later due to health reasons. It might let you help pay for some “start up” expenses for your grown children as they start out in life - money that sets them on the path to security and happiness. It might let you quit your job earlier so you can enjoy your grandchildren while you are still mobile and energetic.
You want to use those calculators to figure out the marginal amount of money you will gain/lose for each option, and then attempt to predict the utility of those marginal dollars. Remember, “winning the game” isn’t having the most money.
To me it is a no-brainer. If you retire at 62 are you going to be pissed off on your 81st birthday that you lived so long? Or if you die before then do you get to celebrate because you beat the system?
Regardless of family history, anyone can have bad luck and I would rather enjoy the money in my early 60s when you are still relatively healthy that gamble on having slightly more money when you are getting (already got there?) to the point that you can’t enjoy it anymore.
Further, it isn’t like a 401k where if you don’t use it, at least you have the comfort of knowing that your kids can use it for their needs. When you die, it’s gone. Use it as soon as you can.
If you expect to live long, and you’re wealthy enough to not need any of your SS benefits, then you might prefer to delay until age 70 so you leave a larger estate for your heirs to inherit.
A side question, from my apparent understanding in reading this thread/some misconceptions: if you’re required to start drawing Social Security by age 70, what happens if you just don’t file for it? Say I win this week’s PowerBall, and just blow off all sorts of paperwork-filling-out for the rest of my life? What will the SSA do, arrest me for not accepting their money?
You’re not required to start collecting benefits at age 70 (at least I wasn’t, though I did receive a letter advising me to do so). But the 8%/year increment stops then.
In my case, I was still working and receiving SS benefits at the same time would have screwed up my taxes.
I just got that letter at 69 1/2. I will be collecting when I hit 70, though.
Right, utility is everything. The marginal utility of me collecting when I retired at 65 was very low. The utility for someone who needs the money to eat is very high.
The utility of taking a cruise? Not sure. My father in law took one when he was over 90. Hell, half the people on the last cruise we took looked to be over 90.
I know I’m probably being pretty dense here and missing something obvious, but how would waiting until age 70 to collect my SS benefits leave a larger estate for my heirs? You mean I would be working until age 70 instead of retiring at 62?
I believe this is what he means:
Assume you have enough money in pensions and assets that your spending is driven by your natural choices, not by the availability of money. You don’t spend yourself willy nilly into the poorhouse, but you’re not having to count your pennies either.
Then every month you can either spend the $2,000 that SS would send you, or withdraw $2,000 from your assets and spend that. To the degree you are receiving SS, you’ll consume your assets (or equivalently, their interest/dividends/growth) at a slower rate. Which means you’ll leave a bigger pile to your heirs.
A topic not mentioned yet that I saw is there’s a tremendous difference in the risk profile and hence the optimal financial decision as between people whose non-SS retirement is based on pensions that are more or less guaranteed, versus those whose retirement will be funded by consuming their own saved assets.
Some folks have large or at least adequate secure pensions. Which will last their lifetime. SS is also a secure pension that will last a lifetime, but is small-ish for most people; it’s a nice adjunct but I’d hate to try to live on it exclusively.
For those folks, taking SS as early as meets their career goals makes sense. Becasue they don’t really need to guard against the risk of running out of income in old age. That risk is covered by the other pensions.
On the other side of the coin, there are people (like me) whose retirement is nearly 100% my savings. My SS even at age 70 will be a small fraction of my expected spending. But my actual work pension after 35 years won’t even buy my beer thanks to multiple employer bankruptcies and robber baron takeovers. My retirement, be it luxo or penurious depends almost entirely on my assets.
In my case, I should have a pretty luxo retirement by my standards as long as I’m willing to burn principal at a sane controlled rate. At least at first and if the market doesn’t tank at the wrong time. But I can live a LOT better in my 60s and 70s if I can count on the largest possible SS payout when I’m 90+. That lets me draw down a lot more of my finite irreplaceable assets during my active early retirement years.
TLDR: if you have a large (by your personal income standards) pension, take SS early. If instead you’re relying on savings, take SS late if you can afford to do so, and if you can’t, hope you don’t live past the end of those savings.
I’ll add to the chorus of praise for @Jas09’s post. Do the math on the money first, and then convert the shape of that payoff curve into a measure of utility and fun. Then maximize that as best suits you.
The key was that I was talking about someone who expected to live a long time (i.e. well past age 82). In this circumstance, the sum of SS disbursements is maximized by waiting until age 70 to apply, regardless of when you actually stop working and regardless of what your goal is for that money.
I offered that scenario as an alternative to UltraVires suggestion to claim early so as to derive maximum lifestyle enjoyment. Point being that when you make a decision about when to first start collecting SS, you need to have a clear understanding of what your life expectancy is (see the calculators I linked to upthread for one actuarial estimator; YMMV if you have known medical conditions and/or family history that suggest a different fate), and what your goals for that money are (live it up right now while you can, save it as a bulwark against indigency when you turn 100, or amass it to leave for your heirs).
You’re asking Machine_Elf so he should probably respond but if you wanted to maximize your estate, the general goal is to maximize the future value of your Social Security benefits as of the date you die. The future value of the payments is a function of the stream of cash flows and the investment returns you earn on them after receipt. But the stream of cash flows for Social Security depends on when you start taking the payments and how long you live.
So, if you expected to live a very long time but earn very little on investments, you would delay Social Security to collect a lot of bigger checks later. You would forego smaller earlier checks, but if you aren’t earning much on those investments, the earnings from those earlier checks won’t amount to much. The way to maximize the future value is to collect an outsized number of larger later checks owing to your Methuselah-like longevity.
If you didn’t expect to live long, you might aim to maximize your estate by taking smaller checks earlier, knowing that you wouldn’t live long enough to collect any later checks. If you aren’t going to live long, the rate of return (if you make reasonable assumptions) doesn’t matter as much as collecting the biggest number of checks.
If you want to leave a big estate, you expect to live a long time, and you expect to earn a lot on your investments, you need to do the math to decide whether to take small payments early (giving them a longer chance to grow at your high earning rate) or take bigger payments later (with a concomitantly shorter potential growth period).
I recommend the online calculator that SSA has. If you don’t have an account yet with My Social Security, it’s worth your while to do it. One thing that hasn’t been mentioned yet is earnings indexing. If you made $50K 30 years ago it has a much bigger impact on your benefit than $50K made last year. The indices increase with inflation each year but only until you’re something like 59 or 60.
When to draw is a personal decision. Personally I’m delaying because I’m still working and make enough where I couldn’t keep it even if I started drawing it. I think in general, if you expect to live well into your 80s, delay it but if you’re not expecting to be long-lived, draw at 62.
That’s the rule of thumb I endorse after a lot of reading and a lot of websites, spreadsheets and calculators. Which leads to me drawing at 70 and my wife at 62.
I haven’t read all the posts but has anyone mentioned another factor you need to take into consideration; the stability of the social security system?
There are a lot of serious questions about how long the social security system can operate under its current conditions. So anyone planning out their future social security payments needs to consider that the payments they will receive in five or ten years might not be the same payments they would be receiving now.
Thats a good rule of thumb from a financial POV, but even after the break even point the money may not be worth that much overall. At age 62 you get 70% of your SS benefits, at age 70 you get 124% (if your full retirement age is 67 at least).
That may mean an extra ~10-15k or so a year in benefits after the break even point, Your health in your 60s is going to be better than in your 70s and 80s, and you may miss opportunities to do things in your early senior years since you declined SS early and held out for the higher payment.
If you expect to live a long time, and you can financially weather your 60s its good to collect at 70 IMO. But if you’re an average retiree who may die at 85, and who may miss out on chances to enjoy life more in your 60s because you delayed collecting SS, the extra 40k you earn in your 80s may not be worth the extra money compared to how you had to scrimp and avoid doing things in your 60s before you started collecting.
My understanding is the system would be fixed with a few minor tweaks, there just isn’t any political will to implement them.
Raise the cap (there used to be a cap on medicare taxes, but Clinton eliminated it in 1993. Something similar could happen with SS someday)
Raise the tax rate
Raise the age
Lower benefits
Tax wealth or investments rather than just income.
I believe something like only 1/3 of GDP is taxed for social security. The other 2/3 is either investment income or above the cap. There is a lot of money to tax for SS if we wanted. I believe its around that range. Point is we have a 22 trillion GDP and collect about 1 trillion in payroll taxes for SS.
I think just raising the tax rate from the current 12.4% up to maybe 15% without even touching the cap would keep it solvent until the next century. My numbers may be off, but minor tweaks could keep it going for a century.
Isn’t it also missing that you can collect social security at full retirement age and still work and earn money without losing any of your SS benefits? I mean, if you retire at retirement age (66 for people who can retire now) it looks like they’re taxed - or rather, some of the SS payments are taxed - if you earn above a certain amount, but you could earn $25k and not pay any additional taxes on your social security. That’s not a high wage, but for a professional it could mean working just a day or two a week. That’s basically the “working part time” that the author suggests people do without drawing on their social security.
So that’s an extra £100k pre-tax income over four years too (till the age of 70), even while drawing on social security.
(I’m in the UK, so had to check that the rules were the same as they are here, and they are).
i think you might be mixing up two things- if you collect SS before your full retirement age and are still working, your benefit will be reduced. by $1 for every $2 you earn over a certain limit. Once you reach full retirement age, your income from work will not reduce your benefit. Regardless of your age, the amount you collect will be subject to income taxes based on your “combined income”, which is defined as 1/2 of your SS benefit for the year plus any other income from working, investments or a pension , If a single person has a combined income of less than $25K , their SS will not be taxable. So take a $2K a month SS benefit. That’s $24K a year. Half of that is $12K - so if you have more than $13K of any other income, 50% of your benefit will be taxable. If you earned $25K , adding that to the $12K (50% of the benefit) comes to $37K -which means 85% of your benefit is taxable
I’m not saying social security isn’t fixable. I said that it’s a bad idea to base your future plans on the assumption that social security will remain the same as it is today.