First, congrats to the daughter of one of this newsletter’s subscribers. She lives out towards St. Louis and was able to use the new car buying method I recommend to get a sweet deal on a brand new Toyota RAV4. Secondly, the working title of this newsletter is “Finance, Travel and Everyday Life”. I shoot to provide roughly an equal amount of messages in each of these three categories. At the end of this note are links to all of the messages shared in this newsletter to date. You can check me to see if I’m meeting my diversification goal. If you prefer an emphasis on one of the three general areas please let me know.
And now to the business at hand Today’s message is simple. I’m going to tell you why I think taking social security benefits at age 62 (the earliest possible age) compared to age 70 (the latest possible age) is a good idea. I’ll use numbers, facts and opinions to support this point of view. Then you, the reader, can decide what might be best for you. It’s too bad that many of you have already made your social security decision. My argument won’t help you. However, you can benefit by what I am sharing. How? You can forward this message to others who have not cast their lot yet with social security.
Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI). The original Social Security Act was signed into law by Franklin D. Roosevelt in 1935. Social Security is funded primarily through payroll taxes. In 2020, the Wharton School of the University of Pennsylvania projected that the fund may be empty by 2032. Do I think the Social Security program will run out of money? No, I don’t. The government will do one of three things or two of three or three of three of the following to “save” social security. They will increase the payroll taxes that fund Social Security or cut the benefits or increase the age when people can collect current benefits or a little bit of each. Are you ready to get started? I will analyze the benefits of taking social security at age 62 and age 70.
Here’s how I make financial decisions. This is a very simple process. If option A earns me one more dollar than option B and doesn’t decrease my enjoyment of life I go with option A. Any questions? It’s important to understand that I believe that if you live long enough taking benefits at age 70 will give you more social security dollars than if you take benefits at age 62. The question is this. Is a dollar as valuable to you, in many ways, at age 80 or 90 as it is at age 62? Americans who qualify for Social Security retirement benefits can choose to file as early as age 62 or as late as age 70 and have a full, or normal, retirement age of 66-67 years of age, depending on when they were born. Despite the wide range of options and the permanent benefit reduction for collecting Social Security early, the most common age people start receiving benefits is as early as possible — age 62.
How many people file for Social Security at 62?
According to a report by the Center for Retirement Research at Boston College, more Americans begin collecting Social Security at age 62 than any other age. 42% of men and 48% of women claim at 62, and well over half claim their retirement benefits before reaching full retirement age.” Just because most people are doing something does that mean it’s the right idea? Not necessarily. Remember your mother saying, “If Johnny jumped in the lake would you jump in the lake?” Nevertheless, there are some very valid reasons for taking social security at age 62.
Reasons you may need social security now. You can’t afford to wait. You have no savings and you have no retirement plan. You’ve lost your job or you are in poor health and can’t work. Your expenses at $2,000/month and you need Social Security to pay everyday living expenses. You likely need to take your social security benefits as early as possible. What should you do if you DON’T need social security right now? Why would you want to take social security benefits early if you didn’t NEED to? Simple. You can take those funds now and invest them at market returns for a very LONG time. This strategy will raise the break-even point for the early years when you are “ahead” in receiving benefits compared to your counterpart who decided to take SS benefits at age 70. If you wait to take benefits how can as you as an individual end up with ZERO SS benefits after paying into the program forever? The answer is simple! Die. I’m not trying to be morbid. But you might die before you can collect your social security benefits. The following information comes from the government’s social security website Death rates of males born in 1954. This is the probability of a male born in 1954 dying at certain ages. Age 62 – 21% Age 70 – 31% Age 80 – 53% These mortality numbers will come into play a bit later in this discussion. I began taking SS benefits in 2012 at the age of 62. My monthly benefit at that time was $1,834. Social security benefits are linked to an annual cost of living adjustment (COLA) based upon inflation. In 2020 (at age 70 for me) my monthly benefit had increased to $2,107 with the COLA. This equates to an annual cost of living adjustment increase over the past eight years of 1.75%.
For the sake of calculations in this analysis, I will use 1.75% as my annual SS benefit increase for future years. Had I waited until I was 70 years old to take my SS benefits my monthly check would have been about 76% greater than the $1,834 I received at age 62. This calculates my age 70 month benefit as $3,228….had I waited. Wouldn’t you like getting a check for $3,228 more than getting a check for “only” $1,834? Don’t answer that question just yet. I have been retired for 19 years. My stock and bond investments (64% stock, 36% bonds invested in low-cost index mutual funds) have earned an annualized rate of return of 8.6%. I will be using a future annual ROI of 8.6% and a future annual SS inflation adjustment of 1.75% in my calculations from here. Is the past an accurate predictor of the future? Sometimes! For lack of better ideas, I will use my 19-year investment return and my 9-year inflation SS results in the following calculations. Now the fun starts! Are you ready? Let’s do this. In 2020 (at my age of 70) my monthly social security check was $2,107. That’s $25,284 annually. My age 70 counterpart, who begin taking SS benefits in 2020 will get a monthly check of $3,708. That’s $44,496 each year.
So my age 70 buddy (I’ll call him Chris) calls me to gloat. By the way, I got the name “Chris” from a random name generator website (random name generator). Chris is pretty happy. He waited until the age of 70 to begin collecting his SS benefits. Chris reminds me that he’s doing better than me. We’re both the same age. He’s getting a monthly SS check of $3,708. I’m getting a check of just $2,107. Does he seem to be thinking that he’s just a little bit smarter than me? Is that true? Does he have a website where he shares an in-depth SS financial analysis? Does he have a newsletter with the smartest subscribers of any newsletter in history? It’s time to read on. In point of fact at the age of 70 (when 31% of people didn’t live to be 70) I am doing better than Chris. So….as I begin my 9th year of SS benefits and Chris begins his FIRST year of SS benefits who really is “ahead”. Is it Chris? During month one of year nine, Chris received a check for $3,708. In the same month, I only got a check for $2,107. Is Chris ahead by $1,601? Not exactly. Here’s why. At age 62 I began receiving a check for $1,834. I’ve been getting that check every month for eight years. At the end of every year, my monthly SS payment has been increased by an average of 1.75%, the COLA increase. So…after eight years and one month of receiving SS benefits things look like this. Chris and I are both 70 years and one month old. How much money have Chris and I been able to scam from the social security system up to this point? Randy – $189,341 Chris – $3,708 Whoa! Chris, you are WAY behind. However, the astute reader would accurately be thinking to themselves…“But someday Chris will catch up and bury you, Randy Neal”. Randy Neal is what my mother used to call me whenever I jumped in the lake just because Johnny did.” Here’s the question. How long WILL it take for Chris to catch up with my social security haul? How about another thought for you at this point. When I began taking social security at age 62 I didn’t really “need” the money. I simply cashed the checks and added the money to my pile. I do know this. Whenever I spent a social security dollar that was one less dollar I needed to take from my investment dollars. Those investment dollars were humming along with an 8.6% annual return! I told you above that after eight years and one month my social security checks had amounted to $189,341. However, because I was receiving social security I didn’t have to take the same amount of SS funds out of my investment accounts. In effect, my SS funds were allowing me to earn 8.6% on the same amount of money that I didn’t have to withdraw from investments because I began getting SS at age 62. Get it? How much, after eight years and one month would $1,834/month increasing with an inflation adjustment every year of 1.75% and earning an annual investment return of 8.6% actually be? I figured you would ask that question. That being the case I prepared a special Excel spreadsheet to give you the answer.
Do you have the discipline to invest your SS money? Before I go much further I know that some folks think it would require a good deal of discipline to invest your social security funds. I don’t think that’s the point. Here’s the beauty of this theory. You don’t HAVE to invest your SS money. By spending a dollar of social security funds you are NOT spending a dollar of investment funds. Therefore you are earning that same 8.6% on the same amount of money you are getting from social security. What exactly would my $1,834/month in SS benefits be worth with an annual inflation factor of 1.75% invested at 8.6% during the entire time frame be? What would Randy’s total look like after eight years compared to Chris’ total? Randy – $203,336 Chris – $0
Happy Birthday! If I were mean spirited I could have sent the following message in Chris’ 70th birthday card. “Happy Birthday Chris. You are only $203,336 behind me in social security earnings today. Loser!” O.K. I’ve taken enough of your time. I win. I beat Chris. Why don’t we just wrap this up right here? See ya next time. But wait. There’s more! Some of you want to know how long it’s going to take for Chris to catch me and pass me, don’t you? Well…I don’t want to disappoint. Let’s look at Chris’s situation in some depth. At age 70 years and one month, his first monthly check totaled $3,708. We’ll also assume that the check Chris receives inflates at 1.75% every year. Then we’re going to assume that Chris can invest (or at least not reduce his investment account by the amount of his SS payments at my investment rate of 8.6%). I’m going out on a limb here. I’m assuming Chris even knows what his annual investment rate of return is let alone how to invest to get those returns. O.K. call me skeptical!
Time to compare So now we are comparing the amount of money I have compared to what Chris has from social security from age 70 on. Ready? Age 70 Randy $203,336 Chris – $0 Difference – $203,336 Age 72 Randy $258,734 Chris – $93,496 Difference – $165,238 Age 74 Randy $316,089 Chris – $194,854 Difference – $121,235 Age 76 Randy $375,469 Chris – $299,814 Difference – $75,654 Age 78 Randy $436,945 Chris – $408,505 Difference – $28,440 Age 79 years, 3 months Randy $475,881 Chris – $476,914 Difference – ($1,033)
Happy Birthday! Finally, at age 79 years 3 months, Chris’ social security funds in total pass mine. I guess to be fair Chris could send me a birthday card on my 80th birthday with the message, “O.K. sucker. Who’s the biggest loser now?” By age 90 Chris will have received $1,141,432 to my paltry $854,160. Chris will then be ahead by $287,282. Congratulations Chris…sort of. More to think about? Let’s think about a few other things. The value of $287,282 in 20 years with an inflation rate of 8% (stimulus payments and more) would be $61,635. But wait, you say! How can you use an 8% inflation rate when you’ve been using 1.75% throughout this analysis? O.K. I admit it. You caught me. That wouldn’t be fair. Busted. So what is the present value of $287,282 in 20 years with an inflation rate of 1.75%? The answer is: $203,057 It should be noted that the social security COLA adjustment (1.75% average over the last eight years) is usually a little bit less than the true inflation rate. That would reduce the advantage Chris has by a little bit but I’m not going to quibble. At age 90 Chris will have received about $200K more than me by having waited until age 70 to begin receiving SS payments. I do think it would be prudent to consider some other situations that will affect this outcome to one degree or another. We don’t live forever…although that happens to be my personal plan Chris has about a 20% chance of living to be 90. That means that 80% of people who think they will be ahead by $200,000 at age 90 by waiting to take SS benefits won’t be. They will be dead.
Will…will…will? Will Chris be as active at age 79 years, 3 months as he was at 62? Will Chris be as active at age 90 as he was at earlier ages? Pretty much 100% of folks aged 90 will not be nearly as active as they were when they retired. Will the social security program change during the next 20 years? Will benefits be reduced? Will benefits be taxed at a higher rate? Will folks who began taking social security payments at age 62 be able to qualify for a larger home mortgage because of their social security income? Yes, they will. I did! Will surviving spouses get more money if their deceased spouse waited until age 70 to begin taking social security payments? Yes, they will. The surviving spouse benefit “Social Security is a key source of financial security to widowed spouses in old age. About 7.5 million individuals age 60 and older receive benefits based, at least in part, on a deceased spouse’s work record. These beneficiaries include 3.7 million individuals who are entitled only as widowed spouses and another 3.8 million who are entitled to benefits based on their own work records but get higher benefits as widows or widowers. These surviving spouse beneficiaries are overwhelmingly women. Example: John Smith has a $1,200-a-month retirement benefit. His wife Jane gets $600 as a 50 percent spousal benefit. Total family income from Social Security is $1,800 a month. When John dies, Jane will get $1,200 a month as her survivor benefit, two-thirds of the benefit the Smiths had received as a couple. The total income for Jane as a widow is $1,200 a month. Example: Bill and Emily Jones each get benefits based on their individual earnings. Each of them is entitled to $1,200 a month, and total family income is $2,400 a month. When one of them dies, the widowed spouse continues to receive $1,200 a month. The widowed spouse cannot get both benefits. Therefore total monthly family income is reduced to $1,200 at widowhood or 50 percent of their former income as a couple.” Yes, 3.8 million surviving spouses (about 1% of the population) will get just a little bit more than their own work record would have paid them if and when their spouse died. Another 3.7 million surviving spouses (also about 1% of the population) will get half of their deceased spouse’s social security payment. That half of a check would be larger for a surviving spouse who waited until age 70 to get SS benefits compared to someone who took SS at age 62….but not by a huge amount. Surviving spouses are subject to the “rule of 90” age situation as well. The rule of 90? It is less than 50% likely that a surviving spouse will live to be 90 and of course, they won’t be playing that much golf or flying to Tijuana all that much either.
So? Yes, we all know folks who are older than 90. We have a beautiful lady friend in North Carolina who is 105. I have a great aunt from Illinois who is 101. My great aunt lucidly maintains to this day that my grandmother (her sister-in-law) spoiled me to death. So? The point is we know a lot more people who didn’t make it to 80 years of age than who lived beyond ninety. That is changing but only very slowly. More important than selling shampoo? In our own personal example, my wife Carol never worked outside the home for 40 quarters. Therefore she does not qualify for social security payments on her own. During her entire outside working life she never paid as much as $1,000 in social security payments. By the way, I have always maintained that the work she did to manage our home and family was much more important than my selling shampoo. Today she gets 50% of what I get in social security payments. To date, she has collected approximately $100,000 in social security checks…that’s on less than a $1,000 “investment”. You can’t go to Vegas and do that well. My bottom-line There you have it. I think it makes perfect sense to take social security benefits as early as possible which is now age 62.
There’s a benefit to having smart kids I received some good advice from our son J.J. (UCLA MBA) when I asked for his opinion on this subject. He’s a long way from beginning to collect social security at any age….but getting closer. This was his contribution. “A good way to think of it is do you want a smaller portfolio and a larger SS payment at 70 or a larger portfolio and a smaller SS at 70? When you delay to 70, you’re essentially using a larger part of your nest egg to buy a particularly well-priced inflation-indexed SPIA.” I think I would rather have the larger portfolio and smaller SS check at age 70. Why? When you die your social security benefits/checks return to zero. On the other hand, if you have a larger portfolio those funds continue to your heirs. They continue to your spouse and/or heirs in a much larger amount than what a small number of spouses might get from an increased benefit as a surviving spouse. J.J. also did some research on the cost of annuities that would payout at age 62 and age 70. These annuities would provide the same income at age 62 as what I actually received from SS ($1,834/month) and what I could have received at age 70 ($3,228/month) had I elected to wait to receive social security benefits. As you can see the age 62 annuity has an upfront cost of $419,092. The cost of the age 70 annuity is $605,039. These prices are for a “single-life” annuity only. There are additional options, which are more expensive. These options allow the purchaser to get some of their money back if they die early or simply die.
There is no doubt As I mentioned early on in my analysis there is no doubt that if someone lives long enough getting $3,228 a month is going to be better than getting $1,834/month starting eight years early. It makes perfect sense that the age 70 annuity is priced (more valuable) higher than the age 62 annuity option. It’s interesting to see the availability at a cost of additional “add-ons” to make sure the annuity pays out at least something. Still, annuities seem very expensive and only worth it for extremely conservative financial investors. Folks can pay a lot for a guarantee. I have always felt that the big winner in an annuity transaction is the financial advisor. I feel annuities are kind of like betting in Vegas. You know that if you play long enough they win.
Life expectancy always wins in the end We’ve seen from the above data that 20% of the population doesn’t live to be 70. If that happens to you there will be no social security benefit for you after paying into the system for 50 years or more. Approximately 50% of the population doesn’t live to be 80. If you do live to be 80 (79 years, 3 months) you will begin to edge ahead of the carefree social security recipient who began collecting checks at the youngish age of 62. However, you won’t be as spry at 80 as you were at 62. Will you need the extra money? If you think your financial situation at age 80 is going to be such that a few hundred dollars each month are needed then waiting to take social security until the last possible moment could be a good idea. If you think that your spouse’s getting half of your SS benefits after you die is going to be a big enough amount to really make a difference in the surviving spouse’s lifestyle then waiting is a good idea. Of course, that assumes the surviving spouse has the lesser of the two social security benefits. It also assumes the surviving spouse survives long enough compared to the deceased spouse to receive a worthwhile benefit. Yes, there are a lot of unknowns. Here’s your opportunity to help someone else As noted above many people reading this message have already made their decision about social security. That being the case the only folks who can really benefit from this analysis are those who haven’t yet made that decision. I have done my very best to keep this analysis as objective as possible. I have used real numbers. I have likely thought much more about this analytically than many. I have thought less about this subject than some. I don’t ever worry about the nominal factors. It is true that there are other factors to consider. However, if I deem those factors to be nominal then I don’t waste my time considering them.
Taxes? Smaxes! I have also purposely avoided any discussion of taxes in this analysis. If I do anything that diminishes my lifestyle to pay a lower tax I want you to come to San Clemente and shoot me. I never complain about taxes. If I’m paying taxes I’m making money. I’m willing to pay whatever amount of legal taxes I owe. Our income is generated from IRA required minimum distributions (RMD), social security and whatever extra comes from things like mortgage refinancing cash-outs, personal savings and additional IRA withdrawals. If I want or need an extra $30,000 I wouldn’t mind in the least that some or all of the 30G is taxable and puts that incremental income in a higher tax bracket. I could have a lot more fun with that extra cash than any potential angst generated by paying an extra thousand dollars in taxes. Remember it is never a good idea to mischaracterize someone else’s belief or statements and then make a case against that mischaracterization. That’s what politicians do. All of this is really just a longevity bet In reality, social security is more of a longevity bet than anything else. You really don’t hear that concept discussed very much. If you die before 80 you lose if you wait to take social security benefits. If you live beyond 80 you can win the social security match if you wait…..but then sooner or later you die…and that’s the “nail in the coffin” so to speak. Whether you take social security at age 62 or age 70 I hope you live to be a hundred and do get the chance to play a round of golf and fly to Tijuana just to have a margarita on your birthday. Randy Lewis San Clemente, California.