I am glad you posted here!
I am curious as to how the 67.2 figure was derived. Was it simply based on the total income over an average life expectancy, or are there methods of factoring in the financial utility ( I think that is the term-the present value of the money) into the decision. After considerable thought I decided to take my SS at 62 because I know that the switchover point is (for me) age 80-close to the average age of 79. I wanted to have the use of money earlier instead of collecting more in my later years. But I could never find any analysis method that did anything except calculate the total money taken in over an average life span. Which seemed too simplistic to me. So if there are other analysis methods you could point me to that would be most appreciated.
I don’t do the math myself anymore, I have software that runs it for me that takes an individuals particular situation into account. 67.2 isn’t the best option for everyone, but in a vacuum, for someone who is single with an average lifespan who is going to work until they take SSI and then use all of SSI for their day to day living expenses 67.2 is best. For a married person it’s more complicated by usually the best option is to have one spouse take SSI around that time too, or a little earlier. But I just sat down with a woman last night who’s best option was to take SSI at 64. It just sort of depends
It’s good as a general rule of thumb. For many people there are other factors that come into play, so it’s not the right time for everyone or even for most. The biggest other factors are how much money you have already saved and are you married (or were you and you haven’t remarried). But there are a hundred little things you need to look at. Unless you need the money (and some people do) it’s usually better to wait at least a little bit. Taking a 30% reduction in benefits for life is a hard number to overcome.
edit: oh, and I didn’t actually answer the question. Yes, total income over average life expectancy adjusted for inflation. This *is *super simplistic, but it’s a place to start.
Thanks!
I wish there was a better answer, but it appears that it is just too individualistic to calculate anything but the total income. Sigh
I am not understanding this. If I retire earlier, rather than later, I am significantly reducing my income (collecting SS vs. earning income from my work).
So, why would I retire earlier if I ‘need the money’.
What am I missing?
mmm
ETA: Unless you are referring to someone who is not currently working?
Usually you wouldn’t be working for some reason, or you find yourself in the position where you are being forced to retire for physical (typically) reasons. For example I am working with a gentleman who is a custodial worker at a large apartment complex. He just had knee replacement surgery and has been told that he will have to be laid off to part time for the winter because he can’t physically do the work. Hes 62 now and wants to see if retiring and taking ssi and his 401k would be better than trying to struggle through the winter on half salary at a job he hates anyway. His wife still works but it wouldn’t be enough. Unfortunately for him he’s going to have to make some hard choices because he hasn’t saved quite enough on his own.
I’m sure there are other situations that I would recognize if I saw them but honestly I can’t think of an example off the top of my head.
This is an interesting and relevant thread.
Will the seemingly infinite number of variables involved in the decision on when to retire there is one aspect that I never see mentioned.
I often read of the benefits of taking social security earlier vs. later. Mainly, that you will be paid in ‘today’s’ dollars, which are more valuable than tomorrow’s. Also, you while your monthly checks will be less, overall you will likely receive more when all is said and done due to the additional years you will be collecting SS.
What this argument seems to discount, though, is the additional years of earning PLUS the additional years of funding your 401k if you postpone retirement another 4 or 5 years. To me this seems to vastly trump the stated reasons for retiring earlier.
In other words, I feel as if I would be *much *better off retiring at 67 vs. retiring at 63 (assuming continued good health).
I’m interested in others’ thoughts on this.
mmm
I think the reason that it’s not mentioned is that it seems pretty obvious. You’ll be better off financially, but is the person considering the choice going to be happy working another 4 years? In many (most?) cases, no. Otherwise, why not just work forever?
I started at 62 because I have another pension that provides most of my monthly income. I fall into the Windfall Elimination Provision (WEP (which is a total screw-job in my opinion)), so my SS is reduced by 40%. It will take me almost 13 years to reach the break even point. So for the next 13 years I will be ahead of the game, afterwards I will start losing ground.
I will say there are many factors to consider in making that decision.
The overwhelming consensus of professionals AFAIK is not to take SS at 62 unless you either must to keep food on table/roof over head, or already have an illness you can be pretty sure will cut your life short. In fact most of them argue to wait till 70, the benefit keeps increasing if you wait till that age.
When I’ve done the calculation myself using the SS admin’s life expectancy table, from which you can derive the probability of being alive in a given year, weighting the benefit by that probability, and discounting at a realistic interest rate* I get a significantly higher present value waiting till full retirement age (66.5 for my cohort) than 62. The present value is not a lot different for 70 v 66.5, but a person of my socio-economic class and habits probably has a significantly longer expectancy than the general table. Also waiting for the higher amount covers part of the risk of living so long that savings, even spent at a prudent rate, will eventually run out.
In sum AFAIK it’s clear you don’t want to take SS at 62 unless you must or are in seriously bad health. I’ve read that only something like 4% of recipients wait till 70, but again most personal finance authors say you should if you can.
*which nowadays is very low. The benefit will increase with inflation once you start receiving it. Govt inflation indexed 30 yr bonds only yield around inflation plus 0.8%, thus it’s fair to take the fixed amount you’d receive first and discount at something like that.
Why doesn’t he apply for Social Security Disability Benefits? If eligible (a big “if”) he gets full benefits. It’s not necessarily a 30% reduction. It is 5/9% deduction for each month of early retirement. Likewise, it is a 5/9% increase for each month over full retirement age up to age 70. One advantage in taking it early is that you can invest that money and possibly get a higher return.
Do you realize that the benefit of waiting is inflation adjusted? And do you realize that the Fed wishes inflation were 2% today - but it is lower?
I’m well past 62 already (and still working) but intend to wait until 70 because the 8% yearly increase for waiting is better than my safe investment money is likely to do.
I also would suspect that means testing would apply only to those who have not yet reached retirement age, since the politicians seem to be very averse to screwing people already on Social Security. Even the Bush proposals wouldn’t have applied to those already retired or I think within ten years of it.
May you live long and prosper, but you must realize that you are taking a chance on living until you are well into your seventies or eighties to reap the benefits of waiting until 70 to collect your SS.
I decided to take a similar chance and bet that I make it to 82 years and 8 months which would mean I made up any lost benefit from taking SS early. This is why I choose to begin at 62.
A good friend of mine was a “wait-er”. His plan was to begin his SS at 66. Around his 65th birthday, he wasn’t feeling well and his wife finally convinced him to see a doctor. Pancreatic cancer was the diagnosis and we lost Carl in less than a year.
By delaying Social Security, you are effectively buying longevity insurance. The “premium” that you pay is generally lower than what you’d pay on the open market, like by buying an annuity. If your primary goal is to pay for the cost of your own living (and not to leave a bequest, etc.), then it’s a very rational thing to do.
You are “taking a chance” only in the same sense that by purchasing home insurance, I’m taking a chance on my house not burning down. I think people view longevity insurance strangely, because they’re more accustomed to buying insurance against bad and expensive things (“house burns down”) vs. good and expensive things (“unexpectedly long life”).
And that’s a big difference. With due respect to the previous poster, if they are not changing their view at all based on being informed SS is indexed for inflation, when they previously seemed to think this wasn’t the case, one would have to question their whole analysis.
On 62 v FRA (Full Retirement Age) the expected PV (present value) at the standard SS admin longevity table, calculated correctly, is significantly higher waiting to FRA. That’s not reasonably debatable. That’s a life expectancy, of course the person could get hit by a bus the day before FRA, or know already the long term condition that’s going to kill them by the time they reach 62. But a lot of people reach 62 in fair health, and taking SS at that age if you don’t have to is a pretty clearly inferior deal to waiting.
Between FRA and 70 the PV isn’t very different on the standard table. But again one must consider their own LE prospects, and as has been mentioned it’s like insurance against living to a much greater than expected age.
I think in reality the bulk of these decisions though are determined by people having to retire at a particular age (no longer employable one way or another) and not enough savings to delay SS after they retire.
I’m quite well aware of that, but my father lived to 95 and I’m almost 65 and in excellent health.
I’ve seen some studies showing that minority populations have reduced life expectancies compared to majority populations, so you can’t necessarily take the national average.
The advice I’ve seen is to take it early if your health is bad - or if you need the money of course.
Lots of experiments in behavioral economics show that the discount rate people use is often quite irrational. I haven’t seen any studies about what discount rate people use in making this decision, but I suspect it has nothing to do with the actual numbers.
I also have an annuity that can start at 65. It also goes up if I delay, and I’ll know the exact number the next time I see my financial planner, since I’m getting close. But the documents I’ve read make me doubt the amount is anywhere near 8%.
For clarity, by “premium” I mean the number of dollars that you have to forgo up front (by delaying) to get a dollar increase in your lifetime benefit. So I mean that delaying Social Security is generally a better deal than longevity insurance that you can buy on the open market, so I think we agree.
Or a person might simply wish to retire and be unable to do so without taking their SS benefits.
I can retire and begin collecting my pension* at 55 and we would do fine because my husband has no actual pension and will have to work until he’s 62. But if we both want to be retired at 62, we’ll probably need the SS benefits, not to put a roof over our head or to put food on the table, but have the retirement we want to. I’m much less concerned about collecting the maximum possible amount from SS that I am about maximizing the number of years i can enjoy retirement.
- it’s a real pension, not a deferred compensation plan. Will pay X dollars a month until both me and my husband are gone.
Another point to consider is how active you will be at what age. This also drags in those possible medical conditions. You probably want to do your travelling, hobbies, or whatever before age 75 or 80, because unless you’re the proverbial 100-year-old who still walks up the hill to the café every day, you’ll need a lot less lifestyle money once you get older. In fact, there’s a good chance by 80 you should be in assisted living, or at least a low-maintenance apartment. Will you have the mobility or even vision to enjoy a varied lifestyle?
Of course, my view is tempered by being in Canada, which means medical expenses are irrelevant. However, the same may or may not apply in the USA? There’s a good chance that no matter what you do, those extra couple of hundred a month will be irrelevant compared to your needs. The only serious problem will be if you are part of a couple and only one needs the expensive care.