Social Security Redux

This is a question that I am trying to figure out myself. I do know any formula will start with your date of death. When you know that, it will be too late.

I think that, if you are healthy, with long-lived ancestors, you should delay as long as possible, given that Social Security is an inflation adjusted annuity, it provides good insurance against outliving your money.

Conversely, if you are from short lived stock and ill, you probably ought to start as early as possible. None of us are promised another sunrise.

The question gets more complicated if you are married. The surviving spouse gets the higher of the two social security payments. Say your husband is already retired and drawing Social Security at a rate that is higher than your's would be if you waited to start. Then, his SS payment provides longevity insurance, because you will get his payment if he dies first. In that case, I would start drawing as early as possible.

The above is my current thinking. I'd love to hear corrections or additions.

As Churchill said, "That is a convention with which I will not put up."

-- Doug

For careful treatment of Social Security issues, it's hard to beat the work of Alicia Munnell and others at the Boston College Center for Retirement Research. Click on publications, then on Social Security under Topics. The original poster might look at Munnell and Soto, "Why do woemn claim social security benefits so early," for example.

David

A direct link is here.

Most of the papers deal with the societal and policy implications of Social Security.

A direct link to this paper is here:

It addresses the issues pretty directly. Scott Burns wrote several articles derived from this paper. You should be able to find them at

-- Doug

This was the article and website that made me realize I should be delaying my benefit. There was a discussion on this issue a few months ago. I am simply asking is anyone has insight on an optimal time to start taking benefits.

Elizabeth Richardson

We'd need a crystal ball to determine the optimal time. Absent that and assuming reasonable health plus no problems with the earned income limitation, my general approach is that if one needs the income before full retirement date (in your case 66), take it. Otherwise, wait for the full benefit.

-HW "Skip" Weldon Columbia, SC

Well, Skip, that's sort of what I thought. The "Optimal" time is delay, delay, delay. Some days this feels counter-intuitive, so I needed to be reassured/encouraged.

Elizabeth Richardson

If the other articles haven't done the math enough to prove the point either way, I'm thinking there's a project for me and excel. Since date of death (sorry to be blunt) is likely the unknown, with most other variables pretty well known, it seems the resulting analysis should produce a curve that starts with one dying 1 year hence, and of course that person should have taken the SS money, all the way to, say, living to 100, and showing the increase that delaying benefits would offer. And the resulting advice would be 'if you plan to live past X age, delaying Y years will benefit you Z$$. (of course, the SS tax bubble needs to be studied along with this, but 'other income' becomes an extra variable too many. One can use the pre-SS benefit years to convert IRA to Roth, and lump-sum the savings observed.)

JOE

The following book discusses your issue. Retire Early? Make the Smart Choices by Steven Silbiger. It discusses the many issues involved with taking Social Security early at 62 or waiting for normal retirement age of 66 or longer to 70. It has a chapter on estimating your age of death, which is one of the issues.

However, it does not discuss the option of starting taking SS at 62, and then at age 70, doing a "withdraw your application" whereby you return all your early SS payments (but not the earnings on those SS payments), and start collecting the higher SS payment of a 70 year old. This is discussed at:

Delay, delay, delay? You'll be dead and won't collect anything. THumper

This appears to be real. So you can hedge against dying early by taking SS at

62, then if you are in good health, return the money at 70 and reapply for the higher payments. Weird.

But the URL referenced is also worth reading for some of the links at the bottom of the page, one of which takes you off to a discussion forum at Morningstar on the topic of when to start SS.

Moderators: I hope you will forgive me for extracting one of the posts, which is a pretty good answer to Elizabeth's original question:

============quote

When will the tortise pass the hare?

Twins A and B have equal earning histories. At full retirement age of 66, both would get $24,000 a year, but B takes SS at 62 and gets 75% of that ($18,000). A takes SS at 70 and gets 132% of that ($31,680). Neither person spends a penny of the money, so we are only watching total savings. We will use real dollars, so there is no cola adjustment before or after the start of SS benefits.

With no interest earnings, A's savings will pass B's savings at age 80 (348,480 vs 342,000).

With no interest from age 62 to age 70, but 5% real interest (above inflation) on all savings after age 70, A will pass B at age 85. (This was your original question.)

With 5% real interest on all savings from age 62, A will not pass B until age 90 (1,131,585.90 vs 1,121,808.81).

With 4% real interest on all savings from age 62, A will pass B at age 86. With

3% real interest on all savings from age 62, A will pass B at age 84.

As you suspected, the early collection of benefits gives B a head start, but it is always overtaken at some point. The larger the real return assumed, the longer it takes for A to catch B.

Al

========end quote

-- Doug

You can use the payout from an inflation-adjusted immediate annuity to eliminate the need for specifying your date of death, as follows:

If you started collecting Social Security in month N and the first month's benefit payment would buy an inflation-adjusted immediate annuity beginning in month N+1 whose initial monthly payout exceeds the increase in monthly benefit you would get by delaying until month N

+1, then you should start collecting at month N.

You can get inflation-adjusted annuity figures from

Dave

Fred, thanks for posting that link. And thanks to Doug, who responded with a very interesting excerpt, and who prompted me to read the articles linked at the bottom of Fred's link. One of the stats posted was that each year you wait to take benefits is like getting a risk free 7-7.5% inflation adjusted return. Perhaps that number came up in the Alicia Munnel articles, but I didn't see it so plainly when I read them. Maybe I should print that out in a big typeface and put it under a magnet on my refrigerator.

Elizabeth Richardson

I think there's something in calculating the reduction between age 62, full retirement, and beyond. I say beyond because after full retirement, SS continues to increase the benefit for a few years, I think until age 70. Since I'm not working anymore, it seems to me there should be a break-even point when you include the annual return on investments and the percentage of decrease/increase in SS. For a number of reasons, I expect to live well into my 90s; there is no question that delaying SS benefits is the right decision, but for how long? Yes, I can plug the numbers into the SS calculator, multiply by number of years of life-expectancy and see the differences. Theoretically, SS is an inflation-indexed annuity, but I anticipate inflation for the elderly to be greater than "normal" inflation. Another variable for you, Joe.

Elizabeth Richardson

IIRC, there is a 7% boost in SS every year you delay past full retirement age. If you can get more than 7% after taxes on your investments, then you should take SS as soon as you get to full retirement age.

I will be delaying SS for a few years despite being able to get more than 7% on investments recently because I wish to convert some regular IRAs to Roth IRAs and need to keep my income down until 2010 when there is no conversion ceiling.

-- Ron

I know I'm responding to a old post, but I've found a pretty good answer to your question.

has an article addressing the break even time to delaying benefits under various spend/invest options. It also gives the probability of surviving to that age. At the bottom of the article is a link to a downloadable spreadsheet that allows you to plug in your age and expected benefit, and it will calculate your specific numbers.

-- Doug

Thanks! I'll check it out.

Elizabeth