D. Scott Kenik is the Founder and Principal of Wealth Concepts Group, LLC.
As a financial professional, the No. 1 question that I receive on Social Security is when to start taking the benefits. Full retirement age—for most, 67—is the age at which you receive 100% of your Social Security benefits. You can take it as early as age 62 with reduced benefits, or you can start as late as age 70 with increased benefits.
It is important to note that benefits do not increase after age 70, so never delay beyond that.
Many advisors offer Social Security maximization calculations to help clients determine the best path to receiving the highest amounts over their lifetime. Online calculators are available as well.
There are two major problems with the calculators: 1. They are all based on average life expectancy, and 2. They fail to account for lost opportunity costs.
Social Security is a life-only payment. Regardless of how long you have worked and how much you have contributed over the years, your benefits stop at your death. Turn on Social Security in January and get hit by a fast-moving train in February, you will receive only two checks, even if you have contributed to the system for 40 years. Live to 100 and you will beat the system.
The problem with basing decisions on average life expectancy is that almost nobody is average. By definition, half of the population will pass away before their average life expectancy and half will pass away after. It is not possible to truly maximize your Social Security benefits without knowing exactly when you will die. All Social Security maximization calculators are just hopeful guesses masquerading as sophisticated, analytic software.
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The second problem with the Social Security maximization calculators is they do not account for the lost opportunity cost of taking the money early and investing the proceeds.
Delaying the start of Social Security after the full retirement age increases your benefit by 8% each year. This is known as Delayed Retirement Credits. However, the average stock market performance from 2003 to 2023 was 9.83%, so it can be argued that taking your benefits early and wisely investing them may outperform the advantage of delaying your Social Security start date—although, unfortunately, we don’t know the future performance of the market. It may be higher in the next 20 to 30 years, or it may not.
A related and more vital concern is the lost profits of retirees who withdraw from their savings while they wait for their Social Security benefits to commence. Not only are they cannibalizing their accounts, but their withdrawals early in retirement can have a devastating effect on their account balance, as evidenced by the sequence of returns concept.
The sequence of returns illustrates that stock market losses in the early stages of retirement can hurt investors’ account balances later in retirement. Withdrawals have the same effect.
Running the numbers, here’s the data and assumptions: Both spouses are age 62. Starting with $1 million in savings and an annual household budget of $70,000, Social Security for Spouse 1 is $24,108 at age 61 and $43,838 at age 70. Social Security for Spouse 2 is $12,054 at age 62 and $21,918 at age 70.
Both the annual, household budget and Social Security benefit will be increased by 3.25% to account for inflation. (Social Security offers cost-of-living increases that vary in amount each year, but as we don’t know the actual future increases, these calculations will use 3.25% as the cost-of-living increase.)
Based on the historical stock market performance from 2003 to 2023, taking Social Security at age 62 for both spouses resulted in a $699,862 gain over waiting until age 70 with the increase in Social Security benefits.
This gain was due to both the performance of the stock market outpacing the increase in Social Security from the Delayed Retirement Credit, as well as the reductions in account balance from withdrawals needed to meet the client’s monthly budget.
Whether your Social Security benefit amounts will be higher or lower than this example, the concept is the same.
While this example worked out best for the client starting their Social Security benefits at age 62, stock market performance varies. Again, we have no idea what the next 20 to 30 years will bring.
With that said, if you need to withdraw from your accounts to meet your monthly budget, taking Social Security at the earliest possible age may result in higher account balances.
An important note: If you are working, taking Social Security before full retirement age will subject your benefits to the Earning Test, which may reduce your benefit amounts based on your income amount. So with that, it may be best to start your Social Security benefits as soon as you are able, once you retire.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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