Retirees Might Delay Social Security And Give Themselves A Big Fat Raise

by: Dale Roberts

Most of us want that bird in hand, to take that government sponsored pension monies as soon as we can.

But have you looked at the math? What if you delay Social Security to secure greater future payments.

You might be surprised at what the math says and what the numbers show.

You might be better off spending more of your portfolio assets first and delaying those government cheques. You'll end up with more income and less risk.

I found this in my email inbox yesterday.

Hi Dale,​ ​​​​​​For most people, Social Security is the foundation of their retirement income plan (and for too many people, it is their retirement income plan). Because of this, you want to approach it in the right way. This week, we’ve compiled a few articles to help you think through how to integrate Social Security with the rest of your retirement income plan, and also how to make the most of your benefit claiming decision

It was followed by …

Social Security: The Best Annuity Money Can Buy

A final frame for viewing the Social Security claiming decision is as an annuity purchase. By starting at age 70 instead of 62, the retiree misses eight years of receiving a benefit of $22,500. But starting at 70 provides the retiree a net increase in benefits of $17,100 per year for as long as he or she lives. The eight years of lost benefits could be viewed as a premium payment for a $17,100 inflation-adjusted lifetime income starting at age 70.By Wade Pfau, Ph.D., CFA - Founder

Of course Wade Pfau and Michael Kitces deliver and offer some of the most detailed and important investment studies and advice. If you're near retirement, entering retirement or in retirement I'd suggest that you follow them on Twitter, visit their sites and sign up for the email alerts.

Back to that Annuity Analogy, who doesn't want a $17,100 raise?

Of course to accept that $17,100 raise a retiree would have to have the ability to fund their own retirement from age 62 to age 70. That might mean harvesting personal portfolio assets, staying in the work force (full or part time), or downsizing your home to create income. You might also have enough if one spouse takes early Social Security while the other spouse delays. In that scenario be aware of that 'relationship risk'. I know you're together forever but consider the implications if you take an early SS and a reduced amount while hubby can wait and eventually benefit from those much larger annual payments. They might take off with that $17,100 raise. :)

The Waiting Is The Hardest Part

Thanks to Tom Petty, RIP, for that observation on retirement funding and the emotional considerations. I listen to Tom most every day.

You might be surprised to read that more often, for those retirees with portfolio assets, it's more beneficial to delay Social Security. That's the case for Canadians as well and that was reinforced for me when I reviewed Retirement Income For Life; Getting More Without Saving More.

That's a great book for Canadians and Americans. In fact many of the studies listed and mentioned in the book are US studies. It's an eye opening look at how retirees actually spend their monies in retirement, and how it might be best to create the most optimal retirement funding model. The book blows apart many of the retirement Rules of Thumb such as that 4% rule. The problem with the 4% rule, of course, is that a retiree's actual spending pattern does not often match that 4.5% annual spending increased for inflation thing. It's square peg and round hole analysis and projection. Of course, most experts, even Kitces and Pfau will admit that the 4% rule is just a starting point. We then need to move on to more of a dynamic or flexible spending plan in retirement.

That flexibility also includes the analysis and consideration of Personal Portfolio Harvesting vs Government Monies.

More Income. Less Risk.

With the delay of those government monies, one might create greater, more perpetual and more tax-efficient income in retirement. Not only that, if one draws down their portfolio amounts they are essentially reducing the exposure to the more risky portfolio assets and eventually replacing that income with more pension-like, annuity-like government monies.

Feel free to debate the long-term viability of Social Security.

For more on that potential outcome, looking an annuities and portfolio stock and bond benchmarks here's Claiming Social Security at 62 or 70.

Mr. Pfau suggests that many retirees who embrace this approach might be able to leave a greater financial legacy to their heirs. That is, you might not deplete your personal portfolio at the time when the more generous Social Security Payments take over. Your portfolio assets might then not be required to fund retirement; they might be free to grow in value for the remaining years of your life.

Of course when it comes to retirement funding, we are all snowflakes. Each of us has a scenario that is unique. No two retirees are alike. And there's likely no way that you, as a self-directed investor, could know or determine the most optimal retirement funding strategy or sequence of asset harvesting.

If we have portfolio assets, it's likely wise to pay a fee-for-service advisor that knows how to run the tables. Ensure that the advisor you hire comes more than well-recommended and is also a retirement specialist.

There are so many considerations and concerns from your tax rate, personal and spousal, your various sources of income and potential income. There are insurance and estate planning considerations. Put it all together, and it's outside the reach of most, or I'd suggest all self-directed investors.

Your optimal spending sequence might look something like this. I ran some mock retirement inputs on a site called Cascade Financial Solutions. I was able to input various strategies comparing annuity vs no annuity, early Government Pensions vs delaying Government Pension, and various amounts of Registered vs Tax Free vs Taxable Investment Personal Portfolio dollars.

In the above evaluation we see the system recommend an early withdrawal of Personal Registered portfolio dollars and a stop and start of Tax Free monies (ROTH in the US).

Things can even get much more complex than the above when we consider other sources of income including home downsizing and inheritances and many other sources of potential income.

Check out this link Retiree Income for some online tools that you can take for a spin. Report back here and let us know what you find and think. If you have other suggestions on free or paid online retiree modelling tools, please share those as well.

It might be more than wise to seek help. It could mean significantly more monies available to spend in retirement. It could lead to the ability to leave a much greater financial legacy.

It might be the best advice you ever receive and the best money you ever spend.

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "like" button. Hit "follow" to receive notices of future articles.

Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, PEP, BLK, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.