Use Social Security Benefits To Enhance Portfolio Returns

by: James Jenckes

Summary

Waiting to begin Social Security Benefits can reduce your portfolio returns.

The arguments for waiting until age 70 to start benefits are not that compelling.

Taking Social Security Benefits now means more investment income now.

I have come to the decision that now is the time to take my Social Security Benefits or SSB. To me there seems to be more advantage for starting benefits now than waiting for some future date. I have heard many arguments for waiting to take benefits until you reach the age of 70. It is proffered that if you wait you will have more income. That is true your Social Security check will be 32% greater than if you took the benefits at age 66. But, if you wait, you might be dead before you turn 70 or if you live longer you will likely collect checks for a fewer number of years.

Here's the issue I have. The longer I wait to take SSB the more I draw down my investment portfolio. I have to reserve about $72,000 a year for living expenses. This year I was hoping to have about $20,000 of my living expenses paid for by dividend income. This would mean I would only need to draw down the portfolio about $52,000. Well, at that rate in about 2 years I will have to start selling parts of my positions to meet my needed income. This will of course start reducing my dividend income. This will of course lead to further assets sales. The demise of my portfolio will then be not far off!

The answer seems simple enough. My SSB will be $2,167 a month or $26,000 a year starting in February. This seems like a win-win situation to me. I now get a guaranteed income for life and I get to keep $26,000 a year in my portfolio. If I were to wait until age 70, I would have to pull an extra $156,000 from my portfolio. I will now get to keep that money in the portfolio and I can continue to invest it in dividend growth stocks.

Just for grins, I ran a simulation purely on how much money you would receive from SSB if you took benefits at 3 different ages and live to be 80 years old. Here, I assumed a $2,000 per month SSB at age 66. Then I reduced the age 62 benefit to 25% of the age 66 benefit. The age 66 benefit was increased by 32% to get to the age 70 benefit.

Begin SSB

Beginning Annual Benefit

Ending Annual Benefit at Age 80

Cumulative Total Benefits Received

Number of Benefit Yrs.

Age 62

$18,000

$25,708

$411,130

19

Age 66

$24,000

$31,667

$415,042

15

Age 70

$31,680

$38,618

$385,505

11

Well, you can see that waiting until age 70 doesn't really do you much good. You actually end up with about $26,000 less than if you had started SSB at age 62. The reason for that is you are getting 8 years more of SSB. Wouldn't it be better to take the money now and invest it in the most advantageous way?

Let's see what I can do with an extra $26,000 this year. How about investing in a company called StoneMor Partners (NYSE:STON)? These folks are in the death business. If you need to get ready for a funeral, this company can get the job done. From the preparation to the casket, to the cemetery plot, they have it all. This is definitely a business that is not going away anytime soon. For the foreseeable future everyone will eventually need the services and merchandise they provide. What does a $26,000 investment in this company get you?

Shares

Price

Cost

Dividend

Yield

Annual Dividend

1001.00

$25.97

$25,998.97

$2.48

9.55%

$2,482.48

There's another almost $2500 I can add to my current dividend stream further reducing the amount I have to withdraw each year. If I were to hold STON for ten years, I would receive a total of about $27,000 in dividend payments. That assumes a nominal dividend growth of about 2.24% annually.

That's just one idea. There are other stocks and other scenarios I could look at, but I think you get the idea. It really doesn't matter when you start taking your SSB as far as your total payout of Social Security is concerned. But when you look at your portfolio returns with SSB I believe you will find that your portfolio returns will be enhanced.

For those not liking the STON stock due to it being a Partnership, you could substitute one of these other good dividend payers.

  • NorthStar Realty Finance Corp. (NRF): This is a real estate investment trust that currently yields about 9%
  • Main Street Capital Corporation (NYSE:MAIN): This is a private equity investment firm. Current yield is about 7%.
  • Chevron Corp. (NYSE:CVX): This is one of those beaten down oil and gas companies. It now is yielding over 4%. This may be a good opportunity to pick up some.
  • Kinder Morgan, Inc. (NYSE:KMI): I think this company is the granddaddy of all pipeline companies. Its yield is now about 4.3%.

Disclosure: The author is long STON, MAIN, CVX, NRF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm not recommending anyone buy any stock mentioned in this article. This article is intended for educational purposes only.