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I make no recommendations, no suggestions, no nothing, but ask what people conclude for themselves. Does the following make any sense under any scenario?
I used the SSA Quick Calculator and the SSA life expectancy table
Worker with Social Security average earnings of $75,000
Starting worker only benefits at age 70: $2578 per month
Starting worker only benefits at age 66: $1923 per month
Monthly additional benefit starting at age 70: $665
Accumulated benefits not claimed from age 66 to 70: $91,824
Estimated value of age 66 monthly benefit if invested monthly to age 70 at 7% per year: $108,751.03
Estimated monthly income from accumulated assets using 4% rule: $362.50
Life expectancy at age 70: Male 13.69 years. Female 16.00 years
This is essentially my logic but we invested both of our total monthly benefits and Connie is 4.5 years older than me.
Our investments from this approach (investing both of our benefits for about four years) – my benefit was the maximum at FRA at the time – now generate about $1,600 in tax-free monthly income from municipal bond funds. Of course, not as secure as Social Security.
FYI
Only about 10% start SS at age 70, 27% at 62 and nearly 25% at age 66. I’m guessing those are not planned strategies, but necessity.
RDQ…
The magic word is IF!
IF you claim early and INVEST…
Years ago, in the late 70’s a guy by the name of A L Williams devised a scheme to “beat the insurance industry at their crooked game!” “How”, you might ask? He developed the strategy of “Buying Term, and Investing Difference.”
I am NOT suggesting your motives for your recommendation for consideration of Claiming social security are anything like his regarding life insurance, but I BELIEVE the outcome will be similar!
Williams’ strategy involved advising and assisting people in surrendering WHOLE LIFE or permanent life policies, stripping out the cash values to invest in mutual funds, and buying Term Insurance instead. Disregarding the facts that Williams and all of his acolytes(he created an MLM Organization with which he caused untold damage to American life insurance policy owners) sold a terrible, low rated term product, and then recommended mutual funds with the highest fees in the market, at the time. Williams became a multi-millionaire, and as you might suspect, his MLM acolytes usually made very little and quit after a short period of “going for it!”
Now…the problem with A L Williams’ strategy was simply that many people surrendered their permanent insurance but they did not “invest the difference.” They spent it. And then their subpar Term Policies would lapse and they were left with nothing!
Claiming early with Social Security will never “leave you with nothing,” but I am afraid many people will not save and invest their benefit dollars, rather they will simply spend them. Not HD readers, of course, but many others.
Your calculations aside, it isn’t that it’s not possible, it is however far more risky. 8% guaranteed, with COLA, is hard to beat in the market. But it is also likely that reasons will crop up that cause one to “need the money this month, but I will get back on plan next month.”
After all, life happens.
As others have and will say, it’s a personal decision! I waited until 70, because I was still working, and for my wife and me, it was the best decision. If a person needs the money to live on at 62, 67, or anywhere in between, file!
We are receiving $73,000 annually in benefits in 2024. We will have recovered 100% of our contributions in 6-7 years. God willing, we will be here to enjoy our hard earned benefits!
Seems to me just about everything is based on ifs, especially financial related. I recovered all i paid in taxes in less than six years starting at FRA, but that is never a goal in my opinion. They are taxes, not investments and unrelated to benefits earned. I do not see SS as an asset or accumulating anything, no different than my pension which does not have lump sum option.
On the other hand my wife and i have SS income, we have several hundred thousand in investments from our strategy plus income generated from those investments.
For that we gave up a higher monthly benefit at age 70 which may or may not have been realized and for how long unknown.
Not trying to sell my strategy to anyone . Too many variables and personal priorities.
Congrats on actually “investing the difference!” Far to few do.
The BIG “x” factor here on a HIGHLY personal choice is life expectancy.
I love that you use the SS Admin life expectancy tables, but that isn’t enough for YOU to decide.
YOU have one unfair advantage here that no actuary or personal finance expert has….a better idea of your health.
Life expectancy increases as we age. Also, the odds of dying in the next 1, 2, 5, or 10 years increase as we age. Dying is also a very personal matter, which means it is emotionally charged and can be blurring. The number of people saying my grandma lived to 95 or, more commonly, my dad died at 58 of XYZ can greatly blur your personal view of your life expectancy.
My wife and I (both age 40) have both lost our parents. Mine passed at age 33 for my father and 58 for my mother. Hers passed at age 56 for her mom and 78 for her dad.
Does that mean we will pass at an average age for our parents (45.5 for me and 67 for my wife)? NOT AT ALL….we have different habits and even a different mix of genes. All 4 of the above parents smoked for a decade or more, a couple drank and a few ate/drank far more sugar. They all likely slept less. They didn’t have as sophisticated science to support their healthcare as we have had. DON’T assume you are destined for the longevity of your other family members. There are shared genes, but there is more to it than that.
Next, we have to look at the social security mortality table averages and understand what is NOT explicitly stated. New technological advancements is not stated. If you are 70, those advancements may be limited in your lifetime. If you are 60 or younger with 20+ years on the horizon, they could be large. Weight loss pills (semaglutides), wearable tech for early detection of heart attacks, better meds to reduce heart plaque and buildup, better cancer screening and early treatment and so on….they are all getting better every 2-3 years and getting better fast (relative to the last 200 years of modern medicine).
Also…what else is not laid out in those SSA mortality tables….lifestyle….are you a smoker or were you? It’s likely that many of those people will live under the stated average (remember, 50% will not live to that life expectancy number). Do you now have high blood pressure or cholesterol? Have you been consuming huge amounts of sugar for decades (I did from age 4-30…and didn’t cut out soda and juice until I had kids at 33). Do you eat the rainbow in produce each week? Do you exercise daily/weekly (sadly, I still do not, I just let the kids run me around)? Are you married or live with someone who can call an ambulance if they notice something wrong with you? Do you have social interactions daily and purpose? What are your sleep habits like? Do you get all needed checkups and do your specialist visits? Do you take your meds as prescribed? And THEN….whats your family genes pool look like? There is a saying “genes load the gun, but lifestyle pulls the trigger.” We can’t change our genes but we have more opportunity to manage them than any other population of people in history. And the opportunity to manage them is only getting better year by year.
The average reader on this site is likely above average in all the things I laid out above.BUT you know yourself. What I suggest…..as INACCURATE as they are…take some life expectancy quizzes…..be painfully honest. Then review your life expectancy at age 66 (NOT 70) when you will FIRST need to decide to take SS payments now or delay until 70.
Evaluate results from 2-3 life expectancy quizzes VS life expectancy tables from SSA and make a guess…will you likely live less than average life expectancy (if so…reduce it by 3 years)….OR live an average life expectancy (stay the same)……OR think you have above-average habits (add 3 years). FIGURE OUT THE MATH on the adjusted life estimates based on (after you take some quizzes) do you have below, average or above-average health).
3 years is a “somewhat average” adjustment….if it feels like too much, do plus or minus 2 years, too little, plus or minus 5 years (I wouldn’t adjust more than 5….then we are getting on the fringe of the standard deviation).
This is what I do….is it perfect….absolutely not!!! But it helps me make a better broad and far-out estimate. Lots can change for my wife and I before we hit 62….67…70…or whatever ages SS benefit may change to before we get there….our health can change, our ability to supplement retirement income with part-time work or side hustle can change, one of us could pass, we could have to support kids or grand kids…..but JUST figuring out for now….above, below or average helps us be confident to plan to take SS for my wife at 70 and me at 62 (unless I am consulting a good amount).
Or, just take SS when you need the money the most or take when you don’t need it and invest it.
What else is there, what else can we control or even accurately predict?
I guess there is another possibility. Accumulate so much in investments for retirement what you do with SS doesn’t matter.
Also…there are a few things missions from the original post.
Diversity of income and tax preference are 2 things that come to mind.
SS (to my knowledge) has never defaulted. It is as close to risk-free, inflation-adjusted income as we can get. By having more SS income….we lower the risk profile of our retirement income. This can do (2) things….smooth out income and make us stress less in economic downturns. OR if we are ok with our risk level….it could allow us to take MORE risk and gain more return long term….because a nice chunk of income is risk free.
Next is federal tax treatment……at most we are taxed on 85% of ss income….some people at 50% and a few at 0%. A nice little perk. Make sure to factor federal (and maybe state) tax savings into your math on when its optimal to claim.
As I have mentioned before, for us the choice was simple.
Our children can inherit all our other assets but NOT our SS payments income stream.
We decided it was more important to preserve those other assets than trying to get larger SS payouts.
Obviously, other people will make other choices on how they feel.
There is NO one ‘correct’ answer.
I understand your rationale, but delaying Social Security doesn’t necessarily mean less wealth for your heirs. In fact, because those larger payments mean you’ll need to draw less from your nest egg later in retirement, they could end up inheriting substantially more. This is one of the key points I made in my recent Forum post:
https://humbledollar.com/forum/just-the-facts-by-jonathan-clements/
I read your reply and the forum post. It does make sense to me.
In our case it was six years ago when we started taking SS.
When we ran our numbers it was apparent that without the funds from SS we would have to take money out of our investments to pay for our living expenses.
in those past 6 years our pensions and SS combined were more than sufficient to pay for our typical monthly expenses.
So, for us, our investments were able to compound over those years without having to be tapped.
Since it doesn’t make any difference now – we can’t undo our past choices – I haven’t bothered rerunning the numbers to determine if we made the proper decisions.
You seem to be mixing a hypothetical example with your assessment of the wisdom of the approach you took. For example, since you used your SS income from ages 66-70 to purchase municipal bonds, I don’t see the relevance of the 7% estimated return (unless that is what your bonds were paying when you purchased them.
That was just a possible investment outcome, not related to me. Pick any percentage or none. The point is the payments can be accumulated.
Running the numbers, it doesn’t appear you calculated paying taxes on 85% of the $1923. Of course some folks may be in a position to pay no taxes on the $1923, but for others they’ll need to factor in their marginal tax rate to see how much will be left to invest.
Or pay taxes separately and still invest the gross benefit.
Thats right, net of taxes.
Did you attempt to run a monte carlo using maybe Empower, varying things a bit to see what it says? That will at least give you an average and a worst case to think about.
Just food for thought
No, but it’s too late in any case. I made my bed and we are comfortable on the mattress.
Are you looking for confirmation that asset accumulation in retirement is a good idea? I think that depends entirely on personal circumstances. Way too many things that go into that decision to try to generalize it.
No confirmation seeking here. But as to the general statement, asset accumulation is a good idea all the time seems to me. Not practical at times but not bad either.
Personal circumstances are the driver as you say.
In our case I am certain we came out ahead of the game which for us was adequate income for dual lives and sufficient assets for any contingency and for a legacy for our children.
Or one could say if you’re accumulating assets in retirement, you may not be spending enough.
The market’s performance over the past 15 years has made accumulation much more feasible for those of us who retired during that period. Accumulation was much more difficult for those who retired circa 1968 and 2000.
I suspect the retirees who are not spending enough are few and far between. Even the 4% withdrawal rule assumes accumulation greater than withdrawal.
The thing is for us, my pension is what we live on plus if we travel we use SS. Otherwise everything else in terms of investments grows and accumulates.
“Even the 4% withdrawal rule assumes accumulation greater than withdrawal.”
That’s not quite correct. The original Trinity Study was developed to determine a safe withdrawal rate that would work for 30 years, with a 50/50 portfolio, in any 30 year historical period. A 4% withdrawal, with adjustment each year for inflation, was found to work in any of these historical return periods. In any given year the return on the portfolio could be less than the amount withdrawn, and the portfolio value would decrease in down years. A successful safe withdrawal rate was defined as one that lasted at least 30 years without exhausting the portfolio.
Since it was a worst case analysis, during periods with better returns, there would be 30 year periods with a positive balance in the portfolio after 30 years. The goal of the study was to find a withdrawal rate that had a high degree of confidence of lasting 30 years. There has been lots of study and updating of the original study since it was first published. Here’s a link to the original paper.
https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
Rick,
I would add that William Bengen published the original article in 1994 in which he concluded that a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.
https://web.archive.org/web/20120417135441/http://www.retailinvestor.org/pdf/Bengen1.pdf
In a brief update in 2012, Bengen stated the 4% guideline was intended as a “worst case scenario” for retirees in United States, using a hypothetical example of someone who retired in 1968 at a stock market peak before a protracted bear market and high inflation through the 1970s. In that scenario, a 4% withdrawal rate allowed the investor’s funds to last 30 years.
https://en.wikipedia.org/wiki/William_Bengen
The Trinity study you referenced used the same data as Bengen and is justifiably credited with popularizing his recommendation.
Thanks – I should have credited Bengen as the originator,
The phrase “I made our bed and we are comfortable on the mattress” is now going to be my financial retirement catch phrase.
That $2,578/month is what a 70 year old retiring this year would get, right? Someone retiring four years from now would get more because of cost of living increases. Assuming a conservative 2%/year that would make it $2,790, or $867 more than claiming at age 66.
Of course, as Jonathan says, 7% after taxes and fees seems completely unrealistic. Vanguard’s Intermediate Muni fund has a 5 year return of 1.67%, and that’s above the benchmark. The Intermediate Treasury fund is considerably lower.
However, I am missing something: $362.50 is less than $665, so your hypothetical worker should wait to 70, unlike you, right? And that’s not considering the higher basis for COLA increases going forward.
Won’t the age 66 amount increase at the same rate of inflation as the age 70 amount? Even if the accumulated amount earned zero it’s still nearly $92,000, right?
Good point, it would be $2,081/month at age 70, or $709/month ($8,508/year) less than the age 70 amount. You still need to allow for the lower COLA base going forward as well.
Exactly. While the percent increase in SS income from delaying claiming will always be the same, the dollar difference between different claiming ages increases each year there is a COLA.
My wife and I both claimed at 70 which was 4 years past our FRAs. In 2020, our combined SS income was $1,679/month more than what it would have been if we had started receiving benefits four years earlier. In 2025, our combined SS income will be $2,058/month more than what it would have been if we had claimed at 66. Thus, while we will always receive 32% more each year than what we would be getting if we had had claimed at 66, the additional amount that we are receiving for waiting until 70 to claim has increased by $379/month, and that amount will grow every year there is a COLA.
The Social Security numbers you’re quoting are inflation-adjusted numbers — which means your assumed investment return should also be in inflation-adjusted terms. Where will folks get a guaranteed after-inflation 7%? As I’ve mentioned many times, if you do a breakeven calculation, you should assume the benefits taken earlier are invested in high-quality bonds — something of comparable risk to Social Security benefits — and not stocks. Those high-quality bonds won’t give you a 7% after-inflation return. Not even close.
No chance I will argue with your logic or math.
My muni bond funds earn between 3% and 3.43% double tax free. So roughly 4.45% taxable. Not near 7% but safer.
I guess we haven’t broken even, but after nearly sixteen years we have over $600,000 in muni bonds paying $1,600 in tax-free income a month.
I don’t feel like we did or didn’t break even because I never even thought about it, but the cash will go to someone at some point and until then if Connie survives me she has good additional income, not guaranteed but close.
Since Connie wasn’t employed after 1970, she will receive have of my FRA benefit. Not as large age the age 70 benefit for sure but …
Again, not suggesting my approach applies to anyone else.
If the muni bonds have grown that much do we conclude you have been reinvesting the income? Have you added to them since turning 70?
All income reinvested from day one. Didn’t stop investing the SS checks until several months after turning 70, don’t recall exactly.