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Summary

  • When should I start Social Security?
  • How will I receive the highest annual income?
  • How will I receive the highest cumulative income?
  • When will I be able to retire?

Every year, more than 2 million people turn 62. Many of those people will wonder, "When should I start receiving Social Security benefits?"

The earliest age of eligibility is 62. The benefit increases each year you delay starting, until age 70, after which point there is no additional increase.

When should I start - age 62 or age 70?

Anyone can go to the Social Security web site and get an estimate for their benefit, based on when they start. I did that. I'm 58. I learned that if I start at age 62, I would receive $1965 per month, or $23,580 per year; if I start at age 70, I would receive $3486 per month, or $41,832 per year.

What is the benefit growth rate? From January 2000 to January 2014, the simple arithmetic average cost of living adjustment (COLA) was 2.47%.

YearIncrease
20002.5
20013.5
20022.6
20031.4
20042.1
20052.7
20064.1
20073.3
20082.3
20095.8
20100
20110
20123.6
20131.7
20141.5
total37.1
average2.473333333

Simple arithmetic average of most recent 15 COLAs

Assuming the benefit growth rate continues at the same pace, here is a chart of what I can expect to receive.

  • Column 1 is the age at the beginning of a 12-month period.
  • Column 2 is the benefit received during that 12-month period, starting from age 62.
  • Column 3 is the cumulative benefit starting from age 62.
  • Column 4 is the benefit received during that 12-month period, starting from age 70.
  • Column 5 is the cumulative benefit starting from age 70.
AgeAge 62 IncomeAge 62 Cumulative IncomeAge 70 IncomeAge 70 Cumulative Income
62$23,580.00$23,580.00$0.00$0.00
63$24,162.43$47,742.43$0.00$0.00
64$24,759.24$72,501.66$0.00$0.00
65$25,370.79$97,872.46$0.00$0.00
66$25,997.45$123,869.90$0.00$0.00
67$26,639.59$150,509.49$0.00$0.00
68$27,297.58$177,807.08$0.00$0.00
69$27,971.83$205,778.91$0.00$0.00
70$28,662.74$234,441.65$41,832.00$41,832.00
71$29,370.71$263,812.36$42,865.25$84,697.25
72$30,096.17$293,908.52$43,924.02$128,621.27
73$30,839.54$324,748.06$45,008.95$173,630.22
74$31,601.28$356,349.34$46,120.67$219,750.88
75$32,381.83$388,731.17$47,259.85$267,010.73
76$33,181.66$421,912.83$48,427.17$315,437.90
77$34,001.25$455,914.08$49,623.32$365,061.21
78$34,841.08$490,755.15$50,849.01$415,910.22
79$35,701.65$526,456.81$52,104.98$468,015.21
80$36,583.48$563,040.29$53,391.98$521,407.18
81$37,487.10$600,527.39$54,710.76$576,117.94
82$38,413.03$638,940.41$56,062.11$632,180.05
83$39,361.83$678,302.24$57,446.85$689,626.90
84$40,334.07$718,636.31$58,865.78$748,492.68
85$41,330.32$759,966.62$60,319.77$808,812.45
86$42,351.18$802,317.80$61,809.67$870,622.12
87$43,397.25$845,715.05$63,336.37$933,958.49
88$44,469.16$890,184.21$64,900.77$998,859.26
89$45,567.55$935,751.76$66,503.82$1,065,363.09
90$46,693.07$982,444.83$68,146.47$1,133,509.55

Comparison between starting at age 62 and starting at age 70

There are arguments in favor of starting at age 62:

  • It is unclear when the Social Security "Trust Fund" will be insufficient to pay out all mandated benefits.
  • It is unclear if Social Security benefits will be means-tested.
  • I would receive a total of $205,778.91 before I reach age 70, that I could consume or invest.
  • If you believe you might die before age 83, the cumulative benefit will be greater.

There are arguments in favor of starting at age 70:

  • The annual benefit will be higher at every age from 70 on up.
  • If you believe you might die after age 83, the cumulative benefit will be greater.

There are probably additional arguments on both sides, but I will stop here, because I believe the "start at age 62 or start at age 70" question is the wrong question for me to ask.

I believe the better question for me to ask is, "How many different ways are there to provide a stream of income that starts at age 62, pays $23,580 in the first year, and grows by 2.47% every subsequent year?"

One alternative is to start Social Security at age 62. Another alternative is to have a portfolio of dividend growth companies with $23,580 in dividend income and 2.47% in dividend growth. There are certainly other alternatives, but I'm choosing to limit my alternatives to these two. You are free to choose other alternatives.

Here is a chart showing various combinations of market value and current yield, all of which generate $23,580 in dividend income:

Market ValueCurrent YieldDividend Income
$4,716,000.000.5$23,580.00
$2,358,000.001$23,580.00
$1,572,000.001.5$23,580.00
$1,179,000.002$23,580.00
$943,200.002.5$23,580.00
$786,000.003$23,580.00
$673,714.293.5$23,580.00
$589,500.004$23,580.00
$524,000.004.5$23,580.00
$471,600.005$23,580.00
$428,727.275.5$23,580.00
$393,000.006$23,580.00
$362,769.236.5$23,580.00
$336,857.147$23,580.00
$314,400.007.5$23,580.00
$294,750.008$23,580.00
$277,411.768.5$23,580.00
$262,000.009$23,580.00
$248,210.539.5$23,580.00
$235,800.0010$23,580.00

How to produce $23,580 in dividend income

Suppose I decide to retire as soon as my passive income is $50,000 per year. (That's not my actual personal goal, it's just a number for this example.)

Suppose I am able to invest in a portfolio of dividend growth companies whose current yield is 4%. (My actual current yield is 4.26%.)

I could retire when my portfolio has a market value of $1,250,000. Or I could retire at age 62 with a combination of $23,580 from Social Security and $26,420 in dividend income from my portfolio whose market value is $660,500. Mathematically, the $23,580 from Social Security is equivalent to the dividend income from a portfolio whose market value is $589,500.

Instead of retiring when my portfolio's market value reaches $1,250,000, I could retire when my portfolio's market value reaches $660,500, which is 47% less.

The less I need, the less time I need to wait.

The less I need, the less risk I need to take.

The less I need, the less yield I need to "chase".

Conclusion

In investing, as in life, the trick is to ask the right question. For some investors, the right question might be, "Which alternative produces the highest cumulative income?". For other investors, the right question might be, "Which alternative produces the highest annual income?" For me, the right question is, "Which alternative allows me to retire sooner?"