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Poor Old Me

Jonathan Clements  |  February 20, 2021

HERE’S A COMMENT I’ve heard countless times in recent years: You should claim Social Security early because you’ll enjoy the money more in your 60s and because you’ll spend less later in retirement.

I think this is nonsense that rests on three wrongheaded assumptions:

  • That spending needs should drive when you claim Social Security.
  • That you will indeed spend less each year as you age.
  • That you’ll be better able to enjoy whatever money you have in your 60s than later in retirement.

Do you believe any or all of the above three statements? Let’s consider the facts and the logic behind each.

1. Claiming early. Yes, there are justifiable reasons for starting Social Security benefits early.

Perhaps you’re in poor health and, if married, so is your spouse. Perhaps, during your working years, you were the lower-earning spouse and thus your benefit will disappear when the first spouse dies. Perhaps you’re out of work, you have no retirement savings and you need to claim Social Security to buy groceries. Perhaps you lie awake at night fearful that the politicians will slash Social Security benefits—even for those already retired. In such cases, claiming Social Security at age 62 might make sense (though, to be honest, I think there’s scant chance that any politician hoping to get reelected would ever cut benefits for existing retirees).

But let’s consider a situation that probably describes most HumbleDollar readers: You’ve taken decent care of your health and it’s highly likely you’ll live to an average life expectancy, which would be the mid-80s for those currently in their 60s, and there’s a good chance you’ll live longer. You’ve also amassed a handsome nest egg, and you’ll cover your retirement costs with some combination of savings and Social Security benefits.

Sound like your situation? Even if you think you’ll spend less later in retirement—and we’ll get to that assumption in a moment—that still doesn’t mean you should claim Social Security early. Instead, drawing on both your retirement savings and Social Security, your goal should be to cover expenses over the course of your retirement in a way that maximizes the total dollars generated by those two sources. And, for most folks, the best way to do that is to cover expenses early in retirement with savings, while delaying Social Security and then relying more heavily on that income stream later on.

Don’t agree? Ask yourself this: Even if you’ll spend more in your 60s, why does it logically follow that you should claim Social Security early? Using this “logic,” it makes just as much sense to draw more heavily on savings in your 60s—and, in fact, almost every expert who has studied the issue has concluded that that’s the optimal strategy.

2. Spending less. According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, households headed by someone age 65 to 74 spent $55,087 in 2019, versus $43,623 for those age 75 and up. In other words, it seems we do indeed spend less as we age.

But guess what? The survey also shows that income plunges as we age, with those 65 to 74 pulling in $65,943, while those 75 and up were at $41,937. That lower income can be explained by things like shrinking household size, as one spouse in a couple dies off, and by depleted retirement nest eggs and less earned income.

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What I find most interesting, however, is spending versus income. Those early in retirement are spending 84% of their income, while those later in retirement are spending 104%. A reasonable interpretation: Older retirees aren’t spending less because they have less desire to spend. Instead, their financial situation is compelling them to cut back—and, if they had extra money, they’d likely spend more.

My contention: No matter what their age, most retirees spend what they feel they can reasonably afford to spend. I wouldn’t assume that you’ll spend less as you age. Instead, there’s every chance you’ll spend more—assuming you have the money. Moreover, even if you aren’t spending that money on travel, eating out and going to the theater, there’s every chance you’ll need the money for health care expenses and long-term-care costs, which often drive expenses far higher as we age.

3. Losing happiness. To state the obvious, the end of life likely won’t be a happy time. But what about prior to that? Does our happiness wane as we progress through retirement?

Two of the preeminent happiness researchers, David Blanchflower and Andrew Oswald, compiled data from seven key sources detailing happiness through life. Head to the end of their paper and you’ll find the data presented in seven charts. As you’ll discover, it’s hard to see much difference in the happiness of, say, those age 65 and those age 80. It seems we’re perfectly capable of enjoying life—and the money available to us—later in retirement.

In fact, you may discover that your continued happiness hinges on having more money to spend. At age 58, when I travel, I’m still willing to fly economy and take public transport to and from the airport. At age 81, when my mother travels, she flies business class and likes to hire a driver to meet her when she gets off the plane. She does that because she can afford it, but also because it now takes more money for her to travel comfortably.

If happiness research has anything to teach us, it’s that we aren’t very good at figuring out what will make us happy. We shouldn’t assume that, in our 80s, we’ll be content to sit in an armchair reading a book and watching reruns of old TV shows. Yes, some octogenarians happily do that—but many others do it unhappily, because their depleted nest egg leaves them with no other choice.

During our working years, to amass enough for a comfortable retirement, we need sympathy for our future self, and that means putting aside money for the retiree we’ll one day become. When we quit the workforce, we need to retain a little of that sympathy. We shouldn’t assume that our 80-year-old self won’t be capable of great happiness—and won’t find plenty of uses for the wealth we haven’t yet spent.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Roboticus Aquarius
Roboticus Aquarius
1 month ago

It’s been said that the first person to live to 200 is alive today.

The discussion about tax benefits associated with claiming SS at age 62 is an interesting one that I’ve been meaning to calculate, as I suspected there might be something there. However, that discussion overlooks one key factor; the insurance value of SS. A guaranteed 8% increase in SS, which is basically a lifetime annuity with a COLA, is unattainable anywhere else for as low a cost as far as I’m aware, and if the calculations mentioned elsewhere are accurate, the 7% benefit may extend your breakeven by 5-10 years.

In a day and age where more and more of us are living more than a century or even past 110 – most of us would find ourselves unprepared to finance such a long retirement. The best way I can think of to insure oneself against the risk of a much longer than expected life span, is to wait until age 70 to claim SS.

If you need to take SS at 62, you take it. If you have no foreseeable need for SS under any circumstances, do what you like. If you are in neither situation, the answer will likely come down to your personal financial situation and your risk appetite, especially with respect the risk of longevity.

A lot of people are obsessed with minimizing their taxes and for good reason, but sometimes the tax tail ends up wagging the dog of our financial lives if we’re not looking at the big picture. I think it’s important to recognize the potential benefits of delaying SS if one happens to survive well beyond their expectations.

greglee
greglee
1 month ago

Does delaying SS imply working longer? If so, I agree, But what really counts is the years of extra income that you can invest to get more investment returns. This also insures you against the danger of an excessively long life span.

Roboticus Aquarius
Roboticus Aquarius
1 month ago
Reply to  greglee

Not necessarily. I think we’d agree that working longer is a very powerful tool for improving the length of time your portfolio will survive.

However, retirement is often not voluntary, and re-employment can be fraught with age discrimination, so the value of ongoing employment can be greatly reduced if that happens. This point is moot, however, if you don’t have enough accessible cash to pay for expenses until age 70 or whichever delayed SS implenentation you would otherwise choose.

The offset that also has to be considered is that of a short lifespan. Unless you love your work and want to do it until you pass, you have to decide how much you value stepping out of the workforce at (for example) 55 vs 60 vs 65 etc.

I think both extremes are important to fully consider, and the feasibility of each will depend on the individual’s financial situation.

macropundit
macropundit
1 month ago

>> “If happiness research has anything to teach us, it’s that we aren’t very good at figuring out what will make us happy.”

True dat. And a great piece overall, challenging many (perhaps dangerous) myths about aging and retirement.

Jonathan Clements
Jonathan Clements
1 month ago
Reply to  macropundit

Thanks!

David Powell
David Powell
1 month ago

Using similar logic, many male+female pension retirees — remember those? — choose no pension spousal death benefit to boost the initial payout even though longevity stats show one will outlive the other.

Steve O
Steve O
1 month ago
Reply to  David Powell

Always chose Joint survivor annuity. Example you chose life income annuity and visit the city on day 2 of retirement. You get hit by a bus and your spouse gets ZERO. A friend chose life income annuity retired and died of cancer 2 weeks later never got one check and girl friend got Zero.

Roboticus Aquarius
Roboticus Aquarius
1 month ago
Reply to  David Powell

Yup. My Dad made the wrong choice. Luckily my Mom will have sufficient resources even if she lives well past 100.

Ormode
Ormode
1 month ago

You have to look at your own personal situation, your savings, what type of accounts your money is in, and what income you will need. If you are well off, perhaps pushing off SS to age 70 and IRA withdrawals to age 72 does not make sense from a tax perspective. Or perhaps you can take SS early, and just invest the money because you don’t need it for living expenses.

So let your personal spreadsheet be your guide, and don’t follow advice that doesn’t apply to your financial position.

greglee
greglee
1 month ago

But money has interest value over time. So it is advantageous to have income earlier rather than later. I’m surprised to find a finance expert that doesn’t know this. If you take SS early, you have the use of the SS payments earlier. If you invest that SS income, you get investment returns on it. If you spend it on cars or a home, you get to drive the cars or live in the home for a longer time.

My wife and I made a small version of this choice when we retired at 68 in 2010, The SS agent offered us the option of pre-dating our retirement to 2009 and getting a lump sum of approximately $20k. We took the deal. In 2011, I invested the lump sum payment in a mutual stock fund, which has made almost 18% annually.

Guest
Guest
1 month ago
Reply to  greglee

Not wise to be one who believes above normal market returns will continue on. That’s just ludicrous thinking. I will be happy to tap my other sources of assets/income until I’m 70 and let my untapped annual Soc Sec benefit grow about 8% annually until then. I believe Jonathan is spot-on with his column today.

greglee
greglee
1 month ago
Reply to  Guest

That 8% figure you give for the growth of the SS benefit does not take into account the loss of the SS income you’ve lost by not retiring earlier.

Jonathan Clements
Jonathan Clements
1 month ago
Reply to  greglee

Of course, I understand and know about the time value of money, and how it affects the Social Security claiming decision. It’s an issue I’ve written about countless time. Please read this:

https://humbledollar.com/money-guide/breaking-even-on-social-security/

greglee
greglee
1 month ago

Well, that’s a relief. But, though it’s clearly relevant, you might have mentioned that in the present article that I’m commenting on, Something else that puzzles me is this: “Even if you’ll spend more in your 60s, why does it logically follow that you should claim Social Security early?”

It follows because we need more income when we’re spending more. It’s obvious. You go on to argue that we should take more from our savings instead of getting it from SS. My wife and I had savings of about $28K when we were 62, since our resources had been depleted by paying off our home mortgage, That $28K wouldn’t even have lasted us a year.

Jonathan Clements
Jonathan Clements
1 month ago
Reply to  greglee

As said in the article, if you have no choice but to claim SS early, then obviously you should do so.

Rick Hagan
Rick Hagan
1 month ago

Another angle to consider is if you have a large next egg, say multi 7 digits, and are close to retirement age (60+), because of the coming SS fund shortfall, there is a high probability that the Government will means test new retirees. If this is the case you would want to take it as early as possible, because once you are receiving SS, they are less likely to take it away.

David Powell
David Powell
1 month ago
Reply to  Rick Hagan

Once you are eligible Congress seems far less likely to take away benefits, or reduce benefits for those reaching full retirement age or 70.

Congress has many fair and reasonable options available to fix the shortfall, ones that won’t have the AARP and 67 or 70 year old voters and donors mad at them.

James Lee
James Lee
1 month ago
Reply to  Rick Hagan

Yes, for those with multiple 7 digits in investable assets, I’ve read 2 reasons folks like this consider taking SS early:

1) As Rick says, for high passive earners, SS may get cut in their later years. If you’re capital gains and RMDs are multi 6 digits per year, the general voting public would likely not care if you sock it to those small number of rich folks.

2) Investing early SS cash streams, even in passive index funds, can have an ROI greater than waiting for those “guaranteed” SS returns at age 70. So as an annuity, waiting to collect SS at 70 is better than any annuity deal you can get on the open market, but if you’re able to take on more risk assets, you ROI can be higher than waiting. Motleyfool.com published an article a few months ago citing just this argument.

Jonathan Clements
Jonathan Clements
1 month ago
Reply to  James Lee

Given that the government collects data on income but not wealth, means-testing based on wealth would be extraordinarily difficult. Even means-testing based on income can be tricky with retirees, given that taxable income is somewhat optional, because a retiree can opt to withdraw more or less from retirement accounts or opt to postpone realizing capital gains. The more likely alternative is simply to increase income tax rates or make 100% of Social Security taxable.

In terms of claiming early and buying stocks, I addressed that in point no. 3 of this article:

https://humbledollar.com/2020/09/not-exactly-true/

The bottom line: Unless you’re that rare retiree with 100% in stocks and nothing in bonds and cash, it’s hard to make an investment case for taking benefits early. You’d be better off first spending down the money in bonds and cash.

Ormode
Ormode
1 month ago
Reply to  Rick Hagan

Or even worse, you will reach age 72 and have a $45K SS check and a $150K RMD. The IRS will love you!

Steve O
Steve O
1 month ago
Reply to  Ormode

Perhaps even better.

Ray
Ray
1 month ago
Reply to  Ormode

best spend it on something fun before you get to that stage.

Roboticus Aquarius
Roboticus Aquarius
1 month ago
Reply to  Ormode

If you’re going to have a problem in retirement, this is the one you want to have. ;>)

David Baese
David Baese
1 month ago

Jonathan – I agree wth you. I just don’t know why. – Dave

Kenyon Sayler
Kenyon Sayler
1 month ago

I was glad to see the discussion about spending tapering off when people get older. My contention was always that many/most people spend less when they are older because they have less to spend, not that they don’t want to spend. You way of looking at it by comparing income to spending provides some data that is correct.

Doug W
Doug W
1 month ago

Long post, sorry!

I retired at 60 with a generous COLA pension and my wife retired at 62. She claimed SS at 62 and I also plan on doing so this year at 62. We were fairly high earners so we will get around 50K total in SS per year. We are very fortunate to have saved a fair amount in IRA’s too and barring unforeseen disasters will have more income than we need in retirement. I am pretty healthy, but my wife has a health issue. However, we plan on living well into our 80’s.

With that rough explanation of our situation, I will now offer my thoughts for claiming SS early as it pertains to our specific circumstances.

We live in a state that does not tax SS. The savings at a state level is around 5.75 percent per year of our total SS. We also have the offset of the Federal tax savings of 15 percent of our total SS per year. I created a small spreadsheet and with those two factors included it looks like we are making the right choice for our circumstances by claiming early.

Let’s say you have 50k per year in SS that nets to 45k with the tax advantages I mentioned above. If you took 50k out of an IRA and applied taxes your net would be around 41k. In order to get you back to the 45k net of the SS figures you would need to take around 52k out of an IRA each year to net 45k.

When I ran the numbers with the tax savings mentioned above, I found that we had about a 7 percent advantage each year from tax savings and even more if you use the last scenario where you try to match the net of just the SS dollars.

Anyhow, it pushed our break evens out by 5 to 8 years beyond the normal break-even ages. That put us in our early to mid 80’s before we lose the advantage of claiming early.

Another factor in claiming early is that we wish to leave a legacy to our kids and by claiming early it will leave more funds available to be passed on to them.

I read a fair amount of articles about retirement strategies, but I have not found any articles that factor in taxes into SS claiming strategies and especially scenarios in which states do not tax SS. By doing so you can bump out your break-even ages it seems.

Am I looking at this from an invalid perspective?

Langston Holland
Langston Holland
1 month ago
Reply to  Doug W

Fascinating. 7.2% tax advantage by claiming at 62 vs. FRA in my case. I live in FL, Roth IRA. I used my tax software to do the what-if’s along with TValue to figure out present values.

Doug W
Doug W
1 month ago

Thanks for your reply! I am glad to see I am not the only one who has run these numbers and then wondered why you do not hear more about this approach. My calculations do not include any gains from keeping the 50k invested year after year either. I know some folks discount that thinking, but it could really add a few more percent of overall gains each year if you factor in a reasonable return on investment.

Steve O
Steve O
1 month ago
Reply to  Doug W

DOUG, Enjoy your retirement and the company of your wife.
Actuary will tell you claim at 62 is the best.
Forget break even static analysis.
I cut and pasted this from an actuary article.
At 62 $375,138 # 1.175
At 66 $319,119 # 1
At 70 $363,561 # 1.14
I have done my retirement spread sheets for 20 years.
Notice how the totals are basically the same.
Now that real inflation is roaring get the stuff and experiences NOW.
My opinion is living life and investing is anything but Humble, takes guts.
I can name 40 dead friends under 55 from electric company career and one dead friend over 84. PS my friends were 20 to 80 years old.

Doug W
Doug W
1 month ago
Reply to  Steve O

Steve, Thanks for some more confirmation of my approach. Social Security is a slippery slope! I do agree with the bulk of advisors that delaying is good for a lot of folks that have limited means and no annuity based income though. Our situation is a bit out fo the ordinary I believe for these days. Take care!

Jonathan Clements
Jonathan Clements
1 month ago
Reply to  Doug W

Have you factored in what will happen to your annual tax bill once you reach age 72 and have to start taking required minimum distributions from your retirement accounts? Many retirees enjoy low tax bills in their 60s and think they’ve done the right thing, only to discover that RMDs in their 70s lead to a double tax whammy, triggering high taxes on retirement account withdrawals and Social Security benefits.

Doug W
Doug W
1 month ago

We are taking distributions from our IRA’s now and in the future the funds taken out should be about the same after factoring in inflation. So I guess our tax situation should not change too much other than at the whims of the politicians. We just use our IRA distributions for travel, etc…(however, we have paused the distributions for now due to COVID). My 100 pct survival pension and our SS will more than cover our day to day expenses. Our advisor says we are the folks he will have to call in a few years and tell us we have to spend more of our IRA’s.

CJ
CJ
1 month ago

I posted this question on another HumbleDollar article, but seems more appropriate here. Has anyone in late boomer/early gen X range (who will hit SS eligibility a few years before projected cuts are scheduled to take effect,) done the math re: 100% benefits now vs 75% benefits later?

It just doesn’t seem as clearcut as “wait until 70” for those of us who can potentially collect several years at 100% first, before losing 1/4 of our earned benefits forever more. Does that extra 25% every month now make up for the 8% higher check value (-25% cut) every month later?

Is there a tool or spreadsheet available to help you figure this out?

Langston Holland
Langston Holland
1 month ago
Reply to  CJ

IMO you should ignore the “projected cuts” and the rest of the fear click-bait speculation. Do the math using the real data you have now along with the projected data available from the social security admin. for your account. I take it that you have another 5 or 10 years before having to make this decision and by then you’ll have much more data about your future benefits. It’s like the weather man – he’s just talking nonsense until a day or two prior to the date of interest.

Things may become so clear at that point that you won’t even need to bother with software. Then again, maybe not. You could do much worse than spend these next years mastering the time value of money (hint: it’s all about the discount rate) and doing your own taxes.

For the record, Jonathan is 100% right to recommend waiting to claim benefits. People like me that can afford never to see a dime from SS play around with spreadsheets figuring out how to maximize the present value of likely future cash flows, but it’s not much more than an entertaining addiction. WHAT IF the $!#* hits the fan and you (and/or your wife) have little other than SS to rely on in your old age? You’ll be wishing you had waited for maximum benefits regardless of what the pretty spreadsheets said a decade earlier.

Steve O
Steve O
1 month ago

The $!#* has hit the fan Joe in diapers signing eos. Spend money now and enjoy life now. I agree the spread sheets are an addiction during the work years.

Roboticus Aquarius
Roboticus Aquarius
1 month ago

….and that’s a mic drop.

Einstein
Einstein
1 month ago

Having an annuity that guarantees income for life is something that should be given consideration. SS at 70? That’s the Queen Mary!

parkslope
parkslope
1 month ago

My wife and I both worked until we were 70 and we are moderately risk averse. Claiming at 70 didn’t require tapping our savings and our combined inflation-adjusted SS income of 84,000+ provides us with peace of mind as well as making us comfortable having more of our money in equities than we would if we had claimed when we were younger.

Steve O
Steve O
1 month ago

The scam-demic changed all these fine ideas. Oh no EVIL government over reach killed all those retirement dreams. American life and freedoms have ended.

Nick Politakis
Nick Politakis
1 month ago

the article is great and I want to share my experience. I claimed social security early because I wanted to invest the monthly check and thought I could get a better return than what I could get by waiting. I am doing it and and 3 years in I think I made the right choice. No one can predict what the market will do but I will keep investing .

Roboticus Aquarius
Roboticus Aquarius
1 month ago
Reply to  Nick Politakis

I would suggest you took on significant sequence of returns risk to do so. My own investment history suggests I’d likely succeed as well, and yet… I’m not so sanguine about future returns. I expect to wait until 70.

Nevertheless, it seems to be working well for you, and I wish you continued success!

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