Take or Wait? The Social Security Question
Note: This is in not supposed to be advice on how you should draw Social Security. Always consult a professional on the specifics of your situation. I originally drafted this post in July of 2020 and then updated it before posting today. This information is time sensitive. Do your own research on what the rules are as they change frequently.
So When Should You Draw Social Security?
So far on the blog I have put a heavy focus on FIRE. Despite this, Choose Beta is a concept that can and should be considered at any point in your life journey.
I was listening to the Dave Ramsey show a couple weeks ago and I heard one of his team members talking about when to take social security. The crazy thing is that it was different than what I had heard Dave say in the past. For anyone familiar with their brand, this is extremely rare. One of the main attributes of the Dave Ramsey teachings is that they are consistent and never change their advice (almost to a fault). If the Ramsey team does not even have a solid view on the topic, it must be worth digging into.
How Does Social Security Work?
I knew nothing about social security up to this point. We don’t expect it will be around by the time we are eligible and therefore don’t have it planned into any of our financial decisions. I have, however, spent a few days reading every article I can find and here is my interpretation.
There are a couple factors that go into calculating your payout:
- AIME = Average Indexed Monthly Earnings
- This is the average of your 35 Highest earnings years indexed for inflation.
- PIA = Primary Insurance Amount
- This is the actual amount that you get paid out by social security.
- PIA is calculated using your AIME and age.
- The amount is adjusted based on 90%, 32%, 15% buckets also known as Bend Points. Values assigned to each bend point bucket change over time but the percentages are constant.
Bend Point Example (2021 values):
Note: This table highlights that the first $966 will be paid out at 90%, then it will pay out at 32% up to $6,002. Anything higher than that will pay out at 15% up to whatever the max payout limit is at the time.
Sounds complicated and it took me a few articles before I understood it myself. Let’s try and simplify. First, they look at how much you earn in your working career and take the average of the top 35yrs. I think there is some form of inflation accounted for but I am going to ignore that for now because we are more worried about when to draw and not the actual amount that will be drawn. Let’s setup a scenario.
Ted is a professional that is trying to retire. He worked for 35 years ranging from $50,000 to $150,000. His AIME was pre-determined to be $96,000/yr or $8,000/month (we will pretend that this includes whatever inflation adjustments go into it). Based on the bend points used above, we can estimate what his Supplemental Security Income (SSI) would pay out:
So if Ted waited until full retirement age (which in this example we will use 67 years old), he should get $2798/month in benefits.
Note: There are tools online and on the social security website that can help you estimate how much the payment will be.
Now the next questions are: Does he wait until 67? Should he take reduced payout at 62? Should he wait until 70? Which pays out more in the long run?
It turns out that there are reduced payouts if you retire before full retirement age and increased payouts if you start after full retirement. Here are the percentages as I can find them now:
This table should hold true assuming Ted would not see an increased AIME due to raises if he worked longer. If He did work until he was 70, and got raises every year, then we would expect his AIME to increase and therefore would be higher than noted in the above table.
We will continue with assuming the AIME does not change for simplicity. Ted must decide on the optimal time to retire. If he looks at his health and it is poor, or his family has a history of dying young, then maybe he wants to take it as soon as possible. On the other hand, maybe he is super healthy and his parents made it into their late 90’s so he wants to wait and get the highest payout. In order to help visualize the total value, we can chart the different options and see what the cumulative payouts end up being overtime:
Depending on what scenarios you compare, the break even point is somewhere between 77 – 82. This means that if he passes away before that age, he is better off taking the earlier option. If he lives longer then that, he is better off taking the delayed option.
The decision gets more convoluted when you take into account that there are some scenarios where you can pass the benefit on to a spouse, minor child, disabled child, and a couple other options.
Other Considerations to Make:
- Do you even have the option to wait or do you need it at 62 just to keep food on the table?
- Do you have someone who will outlive you who can inherit SSA? Social Security pays survivors benefits for a number of years to the worker’s minor children as well as to the worker’s spouse if the spouse is raising children who are under 16 or the spouse is 60 or older.
- What is your health status, family life longevity, and desired retirement lifestyle?
- You also have to remember that you won’t be eligible for Medicare until age 65. So, if you quit your job before then how will you protect yourself against medical expanses?
Position Yourself for a Better Option:
Let’s pretend that Ted has been aggressively saving throughout his career and has more than enough money to live in retirement. In this case, it seems that there is one choice that ends up being superior to the others. You might think that it is to wait until 70 and get the highest payment possible. But, it seems that the opposite is true and here is my reasoning:
Take it immediately
- There is no guarantee as to how long you will live, so the longer you wait, the greater the risk that you will never get it.
- By taking it early, you don’t have to worry that SSI fails while you are waiting for a larger payout (assuming it stays around long enough that you at least hit 62).
- It is a lot easier to leave money in your inheritance if it is in one of your personal accounts.
- You can leave it to whoever the heck you want to without all of the government rules and oversite.
- Saving the best for last: you can put it into the market and let it grow at a faster rate than it grows in SSI.
I used the same chart from above with all of the same assumptions but took the money and invested it in the market averaging 8% return and this is what happens:
Amazing! In this scenario there is no such thing as a breakeven point. No other option is able to keep up with collecting at 62 years old and it’s all your money to pass on to your heirs as you see fit. Not the government!
Even if you decide to spend your Social security immediately, if it displaces an equal amount of drawdown from your other investments, then in effect it is allowing that investment to continue to grow instead of being spent. This is the same result as above.
At this point, it seems like the only time you are better off waiting is if you get to retirement with no other savings and you feel confident that you will live past your 80’s. This is also the scenario where you are having to work until you start drawing on social security because you have no other safety net. Even in this point, are you really wanting to work another 8 years? Or would you rather cut lifestyle to a minimum and actually enjoy some of your time?
- Do not rely on social security to fund your golden years. If it manages to still be around by then, treat it like the icing on the cake. Cut you life style now, start saving now, take control of you future now. Do not rob your future self from being able to retire comfortably.
- If you are able to fund your own retirement, then start taking social security at 62 or whatever the minimum age is in the future. Invest it in good index funds and let it grow or spend it in place of drawing down the investments you already have.
Not sure if this was helpful but it was a fun exercise. What are your thoughts? Did I miss anything?
Until Next time, continue to Choose Beta
March 17, 2021 @ 8:50 am
Thanks for the post. At age 53 and getting tired of the grind and sort of on the fence with SS this post helps. I’ve seen comments like this one: “took social security at 62 and hope I live long enough to regret the decision.”
March 17, 2021 @ 9:34 pm
I appreciate the feedback. I really wasn’t sure which way the numbers would go when I started. Also, I am open to suggestions if there are any other topics you are interested in exploring. Thanks for reading!
April 10, 2021 @ 11:53 am
I’d be interested in your thoughts on withdrawal strategies for the early retiree.
April 12, 2021 @ 12:00 am
Glincoln, that sounds like a great idea. I will target getting out a post on that in March.
Thanks for the suggestion!