When Should You Take Social Security?
There are many schools of thought behind when someone should begin collecting Social Security. One of the more popular ideas is to take it as soon as you turn 62. The reasoning is that it will boost cash flow immediately. The other popular idea is to wait as long as possible. This is because for every year you wait your payment amount will increase by about 8%, so by the time you begin collecting you will receive a much larger amount. So which option should you choose?
Can You Afford To Wait?
First and foremost, there needs to be an assessment done of your cash flow needs in early retirement. Start here with expense tracking peakwm.com/expenses. For many people, their retirement plan relies on Social Security income for the plan to work. If you are in the situation where you absolutely need to receive the Social Security income as soon as you retire, then the decision is easy. However, if you do not necessarily need the income right away, then the next assessment would be to see how delaying social security will impact your retirement portfolio. If delaying social security causes you to make large withdrawals from your portfolio and thus makes your withdrawal rate unsustainable, then once again we will revert back to you needing social security earlier in retirement and the suggestion would be to consider taking the income now. There is a possibility that a temporarily high withdrawal rate can be sustainable if it is indeed temporary. However, that is an in depth analysis that should be run on a case by case basis. If you are able to delay the cash flow while also making a sustainable withdrawal amount from your portfolio, then you advance to the next stage of analysis.
See above how a standard retirement income of $2,000/month can change based on taking it early or delaying the income.
What is the Cost?
When you choose to delay social security there is a substantial opportunity cost that needs to be considered. While it is nice to collect bigger checks in the future you are also passing up on the potential of multiple years of income starting now. For our example, let’s pretend that you have just turned 62 and retired, and would look to assess if you should take Social Security now or at full retirement age of 67. If your benefit at full retirement age is $2,000 per month, then at age 62 your benefit will be $1,400 per month. At first glance it may look like waiting for $2,000 per month is great because that is 42.9% more than $1,400 per month. However, this is 5 years of $1,400 per month that you are passing up on so that you can receive an extra $600 per month later. As a result, by the time you turn 67 you have passed up on $84,000 of income. With the bonus $600 per month that you receive by waiting, it will now take 140 months for you to break even on waiting to collect social security. In other words, you will achieve your break even point at age 78 and 8 months. Naturally, if you want to delay until age 70 the breakeven point will become an even later date. This analysis does not even factor in the withdrawals from
your portfolio. If you need to make portfolio withdrawals from age 62 to age 67 in order to be able to delay social security, then that money is not working for you in the market. As a result, it is another source of opportunity cost because that money could be making you a few percent per year. Let us assume the same exact scenario as above, and assume a 5% rate of return on your withdrawal. Now the $1,400 per month that you passed on, plus the 5% that your $1,400 per month portfolio withdrawal could have achieved, makes your total opportunity cost $95,208.52. This makes your break even point 159 months after your age 67, which is your age 80 and 3 months.
Strategy Example - Spouses
Assessing your break even point and whether or not you should take social security now is an important factor in your retirement plan. For a couple who will each be receiving Social Security, oftentimes one of them will be receiving a larger amount than the other. One strategy that we like here at Peak is to delay the higher Social Security amount, but collect the lower amount immediately. This is a hedge against potentially not living until you reach your break even point. If this happens, then the surviving spouse will continue to collect on the higher social security amount. This amount, of course, has become even larger because it is the one that we chose to delay. Meanwhile, the income received from the smaller social security amount can negate some of the portfolio withdrawal in early retirement and thus reduce the opportunity cost.
Social security is an important piece of your retirement plan, and not something that should simply be left to a Google search. My recommendation is to sit down with your trusted Certified Financial Planner and discuss your strategy as well as perform an analysis with them to see what works best for you. If you want to discuss your social security decision with the Peak team you can reach us at (734) 681-7575 or email me directly at firstname.lastname@example.org.