A Morbid Game

Phil Dawson

THERE ARE MANY WHO claim to speak with authority on Social Security.  I am not one of them. But I’m nothing if not curious. I recently set about testing some notions I have heard with regard to Social Security retirement benefits. A family member had asked for help understanding her Social Security statement, so I had some real numbers to work with. The statement predicted that her monthly benefits would be as follows, depending on when she begins benefits:

  • $1,907 at age 62. This is the earliest opportunity to claim retirement benefits.
  • $2,749 at age 67. This is considered full retirement age (FRA) for this individual, as defined by Social Security.
  • $3,431 at age 70. This is the latest age at which she and everybody else can start benefits, assuming they’re still alive.

It occurred to me that this was the most morbid game of chance ever devised. I have heard it stated that there is roughly an 8% increase in benefits for each year you delay, so I reached into a forgotten corner of my brain to see if I could confirm or deny. The 8% claim appears, even with my limited math skills, to have some attachment to reality, at least for this individual. In fact, for those born after 1943, the Social Security Administration promises an eight percentage point increase for each year you delay from FRA to age 70.

The next question that came to mind: If we apply the 4% withdrawal rule, what is the value of this income stream? The 4% rule is anything but universally agreed to, but it is certainly as durable an idea as you will find in the world of personal finance. It is held by many to be the sustainable rate of withdrawal from a 50% stock-50% bond portfolio through a 30-year retirement. If you start your withdrawals at 4% of your nest egg’s value in the first year, and thereafter increase the sum annually for inflation, you are very unlikely to run out of money over the ensuing three decades.

  • $1,907 a month at age 62 translates to $22,884 per year, which is 4% of $572,100.
  • $2,749 a month at 67 is $32,988 per year, or 4% of $824,700.
  • $3,431 a month at 70 is $41,172 per year, or 4% of $1,029,300.

In other words, in the above situation, if you claim benefits at age 70, you’d have a Social Security benefit equal to what might be sustainably withdrawn from $1 million in cash, an increase of $457,200 over the age 62 amount. This seems like a pretty good deal, merely for missing out on eight years of benefits. You will have an 80% larger stream of inflation-adjusted income to carry you through a potentially long retirement, easing your financial worries and making you less dependent on your portfolio’s investment performance.

Of course, you have no access to the assets that produce this income—and you must be blessed with sufficient health to make it reasonable to delay benefits. If some dreaded disease were contracted at age 62 or beyond, it would certainly lead me to claim benefits sooner rather than later.

Is this something you can influence? Maybe. Almost everybody has room for improving their health probabilities through lifestyle. Even then, longevity is something of a crapshoot. Healthy people of all ages die due to causes that would be difficult to predict or prevent. Sorry, but this is one that’s not entirely in our control.

For most of us, the presence of other income sources will be required to delay benefits. All but the most fortunate will need some source of income prior to age 70. If you have constructed a plan that will meet your spending needs without Social Security, you will have the option to delay benefits. This is the factor, I would suggest, over which we have the greatest influence. Reducing fixed costs, increasing retirement contributions and keeping your human capital fresh—while not the sexiest of plans—is still the one most likely to succeed.

If you are married, there are additional considerations: Even if you’re in poor health, you may want to delay claiming benefits if you had been the family’s main breadwinner, because your spouse would then receive a larger survivor benefit. There are also variables involving taxes that can make the math trickier than it appears at first glance. But the bottom line is: Delaying your benefit, if you are healthy, gives you very good odds of maximizing your lifetime payout from Social Security.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. His previous articles include Dave Ramsey, Making Your Case and Course Correction. You can contact Phil via LinkedIn.

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