Modern Social Security card. (Photo credit: Wikipedia)
Ask just about any fee-only advisor when you should claim Social Security and most of us will jerk our knees and tell you, “70”. Then, you’ll go out and do it early—approximately 43% of men and 48% of women take their benefits at 62. So nobody is listening to financial planners? Why are planners clueless on this?
We add numbers, and we know that you’ll collect approximately 1/3 more for each period you wait—1/3 less at 62 than 66, 1/3 more at 70 than 66. The difference between 62 and 70 is huge. So, let’s look at the dumb reasons people take it early (I’ll get to the smart reasons in a minute).
I want to get it now because Social Security is going broke. Oh come on, I’ve been hearing that one since I was in grad school, which was a long, long time ago. So you vote? Do you know the clout of the AARP? Do you seriously think there is a sole politician who could get elected in this country if he voted to eliminate Social Security? Yes, there will be changes in the future, but if you’re old enough to be able to collect or accurately estimate your current payments, I think you can get off the crazies bandwagon.
I could use the extra money. In some circumstances, I think this is actually smart (see below), but most people I see who use this excuse have a lot of budget problems, and would be better off addressing these through spending alterations. The saddest cases are when they or the spouse are actually working and they get to give back much of it to taxes while ALSO permanently lowering benefits.
I might not live long enough—so I’ll get the money now. One of the reasons Social Security is going broke is that people are beating the system as originally designed—they’re living much longer than the break-even point. For most people that break-even is early to mid-70s. If you have a serious or terminal disease or both your parents dropped dead from heart attacks at 50, maybe I can go along with this. But if you had a parent who lived past 80, and you don’t smoke or suck alcohol through a straw, you’ll probably live long enough for your kids to take your car keys away. Especially with the “advantages” of modern senior care.
Social Security isn’t worth that much anyway. Let’s take a look at a real life example. Joe Blow has done all right at his career, but he isn’t quite ready for that villa in the South of France. His full-retirement-age monthly SS payment will be $2,158/month. If he takes it at 62, the payment goes down to $1,535; if he waits till 70, he nails $2,984/month. So Joe tells me, I’m going to go for 62 and I’ll just withdraw the difference from my portfolio. How much more dough does Joe need in his portfolio? $186,900. If Joe waits until 70, the payout will be nearly double and his portfolio would need to be $434,700 bigger to equalize the draw. For most people, this would make a meaningful difference in lifestyle.
I’ll draw early and just invest it. I’ll believe it when I see it. Actually, I know of someone who did do this. He “invested’ it in a money market account. So, if you’re thinking of this, in order to equal the benefits of the escalating Social Security benefit you need to find a return of about 8% guaranteed, plus guaranteed cost of living increases. Let me know when you find that one, okay?
I hate this job. If you’ve lasted 62 years, you might be able to last another 3 or 4. Do you hate it $400,000 worth?
Okay, I’ve had my fun. Are there any good reasons? A few.
You really are sick. If you have an acute or chronically debilitating disease where the life span is limited, especially if you’re single, you may as well claim. However, if you have a spouse this may permanently reduce spousal survivor benefits, so be sure you’re weighing all the possibilities.
You’re out of work and there’s just no other place to turn. A lot of people find themselves in that situation lately. But if you find a job in a year or so, you’ve made a decision that won’t look so good in retrospect. Try everything else before you tap Social Security.
You have children who can get dependents’ benefits. This is a situation where you may actually need the money more now than later, especially if those kids are moving toward college.
Taking the money now would allow you to tap less of your portfolio in the early years. I’m skeptical, because as I discussed above, Social Security increases faster than your portfolio will in this economic climate, but in some cases it might work, as in the case of older parents with children entering college or people who want to travel now but will be willing to watch Netflix for the subsequent 25 years.
You’ve made other investments that will not or cannot pay off until you are much older. You have a partnership, or longevity insurance or some other exotic situation which will make up the difference in the future. You’re still giving up money, but it might be a worthwhile trade off.
If you have other reasons for or against, I’d love to hear about them. When so many people decide contrary to the best numbers-assessment, there must be good reasons. I’d love the input.
