One of the most confusing questions that needs to be answered when planning for retirement is “When do I begin to take my Social Security benefits?” This is the topic of many discussions, advice columns and even discussed at length on the government social security web site. The topic is confused by regulations related to how much you can make while you take social security at different ages and bonuses that the government will pay for deferring the start date. While I won’t attempt to cover all aspects of the law, I will attempt to walk you through my thought process in deciding when I started taking the benefit.
Before I get into my thought process, let me address some basic guidelines.
- Social Security is a benefit that we have earned throughout our working lives and paid for with payroll deductions. Don’t feel guilty about taking back your money.
- If you are going to work full time don’t take Social Security unless you are over 70.
- Social Security and Medicare are not directly connected so you will need to cover your medical insurance until age 65 regardless of when you take Social Security.
- This discussion assumes that you have the option of taking money out of your retirement savings to live on in lieu of taking Social Security.
To get to the basic question of “When do I start to take social security?” I needed to eliminate all of the noise around the topic. The government wants you to wait as long as possible and has some bribes to keep you off the program. A lot of the analysis fails to recognize the “time value of money”. That simply means that a dollar in my hand today is worth more than a dollar that I will get 5 years from now because I can invest that dollar today and earn money on that investment. This is only true if my choice is to take money from my retirement savings or take social security.
When you net out all of the noise, the decision comes down to how long do we expect to live and what can we make on our investments. Neither of these are easy questions to answer but I can look at some reasonable expectations. If I run the life expectancy analysis that I found on line my wife will out live me and live another 30ish years. I can invest my money in government bonds at about 2% and high yield corporate bonds at around 3%. With that as a point on the curve, I calculated the difference in what I would get in Social Security for different life expectancies and yields. The life expectancy used should be for your wife unless you expect to outlive her.
Knowing that I can’t be certain about either of these results, I constructed the following table:
I ran a comparison of my total take in Social Security income if I started receiving the benefit at age 62 versus waiting until age 66. The years of life represent life expectancy of the longest living spouse from the age of 62 until their demise. The annual yield is the average earnings on the retirement portfolio over the remaining lifetime. Since the real dollar results will vary for everyone, I changed the dollars to the following:
Big Win = We make over $10k more in income starting at age 62
Win = We make less than $10k but more than $0 starting at age 62
Lose = We would have made less than $10k more if we waited to age 66 to begin collecting
Lose Big= We would have made over $10k more if we waited until age 66 to begin collecting
For example if one of us lives to 87 and we earn 5% on our portfolio, then we make over $10K more by taking the benefit at age 62 than we would have made taking the benefit at age 66.
Looking at this table, I concluded that I should start taking Social Security as soon as I could because I expect to earn at least 6% on my portfolio. The tables say that we have to cover 30 years for my wife and I doubt that they are wrong by 10 years. While the analysis is clear, the concept of “a bird in the hand is worth two in the bush” would confirm that the best decision is to take the money sooner than later.
I have started collecting my benefit and my wife will begin collecting her benefit shortly. Since taking the back payout was not an option for me, I didn’t include it in my thinking. However; I can make the cash flow model available. Please send me a request via email if you would like a copy of the excel spreadsheet.