Social Security example - Am I missing something?

Assuming you’re in the USA …

These guys are in charge of defunct pensions. They were created by Congress in 1974 in response to a bunch of high profile pension failures that left retirees and soon-to-be retirees flat broke.

Check with them about the details of your #1 pension. Not all companies are covered and the details are arcane.

As to #2: That’s a big question.

They can at almost any time freeze the pension. Which means that upon your eventual retirement you’d be entitled to the benefits you’ve earned as of today, but would not continue to accrue any increasing benefits during your remaining years of employment. I personally have a pension that was frozen in 2012 and although I’ve worked there ever since, my benefit isn’t growing; it’s frozen as of that fateful date.

If your management can arrange to declare bankruptcy, perhaps as part of an arranged merger, they can also terminate the pension plan.

If terminated and the plan was underfunded versus its needs, then PBGC would take over. And would pay out some fraction of the value you thought you’d earned. PBGC stretches the available money to cover all the people owed by two means:

  1. Limit anyone entitled to a large pension to only collecting a small one instead.

  2. Divide the total money available by the total owed (after the adjustment in step 1) and pay everybody their “fair” share. Which might be 80 cents on the dollar or might be 15.

All the above is a massive oversimplification.

But the short version is your pension is only safe if your employer isn’t merged, sold, hostilely taken over, bankrupted, or run by crooks. And that has to stay true until the day you retire and take your money as cash, not as a monthly payment.

The dollar 20 years from now is increased by the additional money you get by waiting until 70.
There is another factor. If you have investment money, you want to sell high not low to finance your needs. In the current market if I sell something instead of using SS I’m profit taking. When (not if) the market falls, if I could use SS to live on my investment will be preserved for the eventual recovery.
This isn’t timing the market, since it is based on the current market not expectations of what the market will be.

Sure it’s more money per month, but it’s a long time coming. Here’s some numbers from my social security calculations. At 66 I could get $2,504 dollars per month. By waiting until 70 I increase my payout to $3,305 dollars per month, an extra $801 per month.

But if I collect at 66 I will have collected $120,192 dollars before my first enhanced check comes in. That extra $800 starts coming in every month, but it’s 150 months before I break even, and that’s assuming I did nothing but spend the payout I started collecting at 66 rather than investing it.

In my case I’m married, so my wife could start collecting on my record as well as hers. She took a reduced payment at 62. Half of my full benefit is only an extra $76 on her reduced benefit, but 48 months of that would push off the break even point an additional 4 and a half months, so I’m actually 83 before I’m made whole.

So there I am, 83, finally enjoying the profit I’ve made. I’ve elected to wait until 70, mainly because my wife chose her grandparents wisely and has a lot of nonagenarians in her family tree and the widows benefits will include the enhanced benefit, but I’m already 10 years older than the age my oldest grandparent lived to.

In my case, I don’t need the money anyway. I’m trying to spend down my Individual Retirement Arrangement (IRA) before I start taking Required Minimum Distributions (RMDs). I convert as much as I can each year while making sure I stay below the threshold where the Medicare Income-Related Monthly Adjustment Amount (IRMAA) kicks in.

That’s the critical thing, and where marginal utility matters. Anyone who would have a worse life by delaying SS shouldn’t. Then there is life expectancy.
But if those don’t matter, then the question is whether a dollar spent from your investments to support your life will reduce your income by more or less than a dollar spent from SS. Chances are that a dollar left in SS which is getting an 8% return, safely, is a better investment.
It sounds like for you, as well as me, that taking SS now would not affect my life at all. I’m taking money out of my IRA to reduce my RMD also, but I ran the numbers and found that it won’t make that much of a difference even if I didn’t, especially with the age where you must begin distributions delayed.
When I did the hack I mentioned above my wife wasn’t quite 66, so I ran the numbers to see if she should wait. It turns out the situation of her taking money until I hit 70 is identical to her dying when I hit 70, so taking the money early was well worth it.

But it’s not all about the bottom line dollar. I can guarantee that I will enjoy that dollar a lot more at 65 than I will at 85. And I think that’s the point that Bill_Door is getting at. Sometimes we are too fixated at the spreadsheet and not enough at life.

My father at the end of his life bemoaned that he had money (early eighty’s) but didn’t have the energy or physical ability to enjoy it, but he could have 20 year previously.

On the spreadsheet side, as I discussed up thread, one forgoes as lot of SS money by delaying taking it. You can catch up if you live enough, but my breakeven point is when I’m 82. Honestly, what are most of us going to do with the money then?

The thing to consider is how your life would change by taking the money early. The extremes are that you would get to eat three meals a day, in which case take it, or that you’d just have an equivalent dollar in your investment account with no change in lifestyle, in which case don’t. My FIL live to almost 101 and was active, taking cruises, until his mid-90s.
A few other factors. By waiting, I maximize my estate, which will be useful for my kids and grandkids. My kids don’t need any money now, but my grandkids might in 20 years.
Also, with the market high, I figure there is a good chance that a dollar I take out now might be worth 80 cents in a few years. SS will keep its value. I learned this during the Bubble when we went on an expensive cruise with money that would have disappeared if we had kept it where it was. If I had been smart I would have cashed out more.
There is no right answer for everyone, but for me it is waiting until 70 since there is not one thing I’d do with the SS money that I’m not doing now.

It’s possible that your old pension will be worth something, possibly everything it otherwise would have been worth. The pension plan is separately organized from the company, so the company going bankrupt doesn’t necessarily bust the pension (although it, obviously, stops new people from joining and stops the company from making additional contributions). If the pension plan was well-funded at the company’s bankruptcy and has been well-managed since, the pension may still be able to pay all of its obligations, including the money that it owes to you.

If the plan went bust too, either with the company or later, the Pension Benefit Guaranty Corp. may be able to make at least partial payments. The PBGC is a government agency that effectively charges pensions for insurance. It uses the premiums to pay retirees some benefits when their pension plans go bust. I’m not that well-versed in how PBGC support works for people who hadn’t yet retired when the plan went bankrupt.

The length of time it existed in the past isn’t particularly relevant. What is relevant is how financially stable the employer is (so it can keep making contributions as needed), how solvent the plan is (that is its assets versus its future pension obligations) and how well-managed it is (which can always change, even for the best plan).