Last Word on Social Security
I’ve covered this topic plenty and continue to tell people about it. A few weeks ago someone commented that “I’m in the minority in my opinion.” That’s a source of pride for me because I am a trendsetter not a trend follower. The math supports my opinion if you look at it correctly. You should always take social security as soon as you can get it. The exceptions to this rule are few but do exist so I’ll explain each of those.
- If you’re still working
- Roth Conversion
- You have so much money that it doesn’t matter
In the past I’ve seen dozens of cases where advisors recommended people delay social security just so they could sell an annuity. Most were guaranteed lifetime income so when social security was tapped, the client would be forced into a higher tax bracket. Long term products are not the solution for short term problems like a short term income gap. That’s basically when I started digging into the numbers and it was easy to figure it out from there.
Time value of money is an important concept to understand. In simple terms, money now is worth more than money later. Delaying social security often costs money and that cost is never factored into the equation in any of the calculators I’ve seen. In terms of cash flow you do get more for delaying payments but the break even between two options turns out to be the early 80s for most people. So you have to wait until fairly late in life to actually derive a benefit from delaying social security. Add in the time value of money and you never break even.
This is especially true if you are spending money out of pocket just to get higher payments later. Then increased payments aren’t free and the cost is another variable that determines whether the higher income is worth waiting for. It’s not. Spend their money first and yours last. In relation to income it’s obvious but this also affects every other part of retirement and none more important than legacy. You can’t leave social security to beneficiaries other than a spouse. Spending money that you could leave to your heirs just to get more of something you can’t leave is silly.
Everyone who has seen this website has also seen other promotions. I’m not the only person giving financial advice on YouTube. Lots of people send me videos and ask for my comments on different products and strategies that others advertise. Just this week someone sent me a video from a group that is promoting a tax free retirement from age 70 and beyond. There’s lots I could pick apart in the overall strategy but it’s the first step that caught my attention. These advisors recommended delaying social security to age 70.
The example couple was 65 years old and had just retired. The advisors advocated waiting on social security and covering the gap with IRA money. Together the couple could collect $5100 per month at 65 and $6600 per month at age 70. So they would get an additional $1500 monthly for waiting. The solution was to use roughly $360,000 to buy a five year income stream that pays $6600 per month. After five years the money is gone, payments run out and they could continue collecting the $6600 from social security.
Although the income stream is seamless, the whole idea is ridiculous. The guy I assume was the expert commented that not delaying payments is the biggest mistake all retirees make. He said that you are essentially giving up an 8% annual return on your money by taking payments early. Well it’s not growth on an asset, it’s an increase to income. It cost these guys $360K to get more money. It would take them 20 years of payments to get the money back and they’d have to live beyond 90 to make a profit. There’s that darn old time value of money concept again.
There are lots of opinions out there and I have mine as well. When it comes down to what works best, I like to use math to settle things. This is a specific case and every one has different numbers but it will work out the same. Substantial additional cost up front is very hard to recover from. With few exceptions, you should take social security when you can get it.
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Last Updated on September 21, 2023 by Bryan Anderson
I find that what is often missing in the when to take social security discussion is the value of the higher earner’s SS by waiting for age 70 to claim the benefit, and its impact on a surviving spouse who might be collecting a lot less and would be able to switch at the higher earner’s death. Does that in any way change your advice, granting that you qualified your remarks by allowing for different situations requiring different solutions. Thank you.
That is indeed part of the calculation. If several hundred thousand dollars is saved upfront then you’d have more than enough money available to plan for contingencies like that. The fact that the worst case scenario is only a possibility suggests that flexibility and control over a lump sum of money would be more beneficial.
Don’t agree with you, I have so much money that it doesn’t matter, plus my wife and I both have pensions which more than pay the bills, waiting until 70 just makes sense to me, I don’t know where else I can get a guaranteed 8% per year, on the flip side, enjoy it while you can, I am almost 69 and healthy but slowing down physically, My break even age on SS is 81, not sure there is a right answer for me, I do have longevity in my family but healthy folks don’t know when they die
Philip – you are certainly one of the exceptions. That was specifically listed in the newsletter. If you have plenty of money then you can do what you want. Hopefully payments don’t get cut before you break even.
I’ve brought up the same points at “free” financial seminars and the speaker always acts confused. It takes a minimum of 12 years to make up the deferred income from delaying SS payments for one year to get the 8% bump up in monthly checks. Here is another point. Say the couple spends their money to live on from age 65 to almost 70 and both tragically suddenly die before collecting their 1st SS check. They would leave the heirs with $360,000 less money and nobody would have gotten a dime from the government!
Great point David! That’s the opposite side of the spectrum that needs to be considered as well.
My wife and I took SS on our 1st available date and now that I’ve passed my break even point, I’m a bit put out. However, I’ve had years of SS payments that paid the bills, so that’s the plus side of the equation.
You made a comment in this episode that’s against our life plan and that’s “legacy”. It sounds like your against legacy and I’m curious why.
I’m not against legacy but I do know that it’s not important for everyone. All things considered you are still well ahead because you didn’t spend out of pocket for bills before now.