- There are three prime ages someone might pick to start collecting their Social Security: 62, the soonest age; Full Retirement Age (66,2mo - 67), or 70, the last starting age.
- This article will briefly review the most common reasons that Seeking Alpha writers and readers have stated to explain why which starting age makes the most sense.
- I will then go through our personal situation that explains why now and not when I turn 70 and would get the largest payout.
- The article closes with deciding when to start your Social Security could influence your portfolio strategy.
One of the most discussed topics on Seeking Alpha and many retirement sites is "When do I start drawing my Social Security?". It seems everyone has their opinion and many don't take kindly to those who disagree. Unlike those theoretical articles on Social Security, I will use my actual situation and amounts that my wife and I will be receiving. At the end, I will briefly discuss how this will influence our investment decisions.
In a moment, I will list some of the reasons for the most discussed starting ages: 62, the soonest age; Full Retirement Age (66,2mo - 67), or 70, the last starting age.
A vast majority of both sexes start the year they become eligible; very few wait to the last age allowed. The second biggest choice is one's FRA. Social Security provides the majority of income for most retired Americans. For about 50% of seniors, it provides at least 50 percent of their income, and for about 25% of seniors, it provides at least 90 percent of income.
Did you know not everyone gets the same benefit per dollar earned? Social Security pays lower-wage worker more per-dollar earned than those paying the maximum amount of SS taxes each year.
Common reasons given as "best time" to start
Before I start listing reasons, if one takes "best time" to start literally, you have a 1-in-97 chance of being right, as that is the number of months you have to pick from as your starting point. If a couple both want to start at the optimal age, the odds are 1-in-9409. And of course, you will never know if you made the optimal choice as that is not known until you are both in that pine box (which SS gives $256 toward but only to a surviving spouse!). It is my understanding that the Social Security payouts are designed to all generate the same amount of income at the life-expectancy age, or about 78. The reason for the debate and Social Security calculators saying otherwise is the assumptions the SSA uses in their calculations.
Possible reasons to start before your FRA
- You need money to live on. There is probably no better reason.
- You are in poor health and/or your family tree has a history of dying before 78. This would right up there with reason #1.
- You want to travel and doing that now rather than later has advantages like mobility and unexpected life events.
- When you enroll in Medicare. There are Medicare premium benefits like the "Hold Harmless" rule that only apply when Social Security deducts your Part B premium from your check.
- You rather spend the government's "money" than dip into your retirement nest egg.
- You have proven you can earn more than the "delayed credits" provide plus any Social Security COLA increases. Actually, earning less affects the break-even age.
- You are single and no one benefits from waiting for you to collect a larger Social Security check.
- Several of the above reasons flow into this one: The money is in your hands, not the governments. This covers both the concern future Social Security benefits will be cut or you are not around to collect (a possibility).
- You have a COLA-protected pension so maxing out another COLA income stream not critical.
Possible reasons to start at your FRA
- Your spouse gets a nice bump in their SS check. Before 2017, you could "File & Suspend", allowing your spouse collect while your benefit continued to grow.
- The penalty for starting early is gone. If you expect to draw off your spouse's Social Security when they start, you are starting before the FRA reduces your spousal benefit by the same percent as your check was reduced.
Possible reasons to wait to the last minute: age 70
- You are single and do not have a pension or large retirement nest egg.
- You do not need the money to live on and believe the built-in Social Security increases provide better "return" than you can earn.
- You are in good health and come from a family with lots of people who lived past 78, maybe into their 90s.
- You are married, have the higher Social Security check and the only pension. When you pass, the smaller Social Security check stops and unless you accepted a reduced pension, that income source could be greatly reduced or gone, depending on what you signed up for at retirement.
Is Social Security going broke?
Each year, the Social Security Trustees must file a report on the financial strength of the Trust Fund. Investment News reviewed the report for its readers (link). If Congress does nothing, current payroll taxes will only cover about 75% of projected benefits in 2034, the date the fund dries up. Not surprisingly, people who focus on that data tend to start collecting sooner than others (link).
Is there help out there for when to start?
Yes: even the Social Security site has a link that compares some popular free online Social Security Calculators. There are also sites that offer calculators for a fee. I chose not to list those as it could appear as endorsing some. These are easily found by googling "social security calculators". I was not impressed by any of the free ones I tried; too many limitations, especially if married and one spouse had already started collecting. Remember, if the calculator doesn't ask enough questions to fit your situation, take the answer with that proverbial "grain of salt"!
The math behind why I started now
My FRA was July 2021. I picked September to start (first check October) and it fit into our IRA-to-Roth conversion plans and limiting 2021 to three months of enhanced Social Security income kept us under what I estimate the first IRMMA limit will be for 2021 income. To place us into perspective with the reasons above, here is where we are:
- This raises our guaranteed income above our expenses so now we do not need to use our retirement nest egg to live on.
- Except for the parent that died of breast cancer, the others all lived into their 90s.
- My wife is three years older and suffers from several medical conditions that most likely will prevent her from reaching 80, thus we had her start drawing one year early. If she dies first, I will be fine as I have the much bigger SS check and have a pension (non COLA).
- If I go first, her guaranteed income will drop by slightly over 50%. If I pass before 2039 (making her 87), my $250k Term policy pays off, which offsets the income loss for 5-7 years.
Assumptions made or facts used for my SS starting date decision
- My first SS check will be $3066. I estimate my check in May 2025, when I turn 70, would be 30% bigger, or $3986, not counting COLA increases. My wife's SS check would be the same as it doesn't increase if I delay beyond my FRA. That said, my starting bumps here check from $1100 to $1560.
- Calculations allowed for an inflation factor to be used. I tested 0%, 2% and 5% inflation rates.
- I assumed all of this would be taxed at our marginal rate, a very pessimistic assumption. Also ran tests using no taxes.
- Ran multiple scenarios, assuming we spent none of the money from SS and we could earn 0%, 2.5% or 5% on what we then invested. Above 5% pushed most of the break-even ages to the century mark for me.
Author's note: The numbers inside each table represent the month/year when starting at 70 matched the results of when we both really started.
|ROI||0% Tax||22% tax|
Table #1 assumed no inflation. The 0% ROI provides the results for a couple who spends all the SS checks. The very realistic 5% ROI/20% tax bite translates into my wife being 95 and me being 92 as break-even ages.
|ROI||0% Tax||22% tax|
Table #2 assumed a more realistic 2% inflation. Here the results were very interesting. In the 0% tax world, the break-even period shortened (vs. 0% inflation) while the 20% tax-rate results showed just the opposite. A 7% ROI would result in us never reaching the break-even as the accumulated difference was still growing.
What if tests
Since my wife is older and has multiple health issues that she has been told limit the probability of a normal life span, I ran two more scenarios using 5% ROI/20% tax/2% inflation. If she lives to only 75, my break-even age is 89, not my late 90s. If she lives to 80, I can live to 94 before the Social Security decisions we made are "wrong".
I ran another set of tests using 2-5% inflation and one thing never changed: our combined SS checks if we waited until I was 70 would have been more by around $1000/month, though my wife's check actually would be smaller. At 2% inflation, 5% ROI and 20% taxed, starting when we did saved us from spending down our other assets by almost $140,000. That amount and the earnings on it, offset the SS check shortfall starting when I turn 70 and why long lifespans should still result in starting at my FRA was better than waiting.
Setting your Social Security starting date(s) sooner so you do not have to dip into the investments you made to support your retirement would allow you to use a more aggressive equity allocation strategy possibly than another investor who has to pull out income or sell shares monthly to cover their expenses. Likewise, the allocation in Fixed Income assets could be less aggressive in terms of interest-rate or default risks as shorter-duration, Investment-grade bonds, plus dividends, could meet their cash-flow needs.
Of course, the more you use Uncle Sam's money, the more will be left in your estate to give to charity and family in your will or trust.
How collecting SS now affects our investing
I mentioned earlier that by starting now, we go from a cash flow deficit to being positive. This will have no effect on how we invest our IRAs accounts as if things stay as they are, we should not have to take more out than is required by law. The real change is going more to growth, less income in our taxable brokerage accounts. We will move from taking interest-rate risks to taking on more equity-movement risk since we won't (hopefully) have to sell when the market is down. Dividends will replace some bond income, which will lower the tax bite.
Considering your SS income as Long-term CD
While unlike a CD is the fact the "principle" could end upon your death, the cash flow is guaranteed (ignoring the unlikely 2034 cut) as it would be with a bank CD. One strategy is to replace other, more risky Fixed Income assets with your "SS CD". According to SSA, the average retired worker receives $1555/month, or a little less than $19,000 per year. Let's say you are replacing 5%-yielding FI assets, that means your SS check equates to about $380,000 in assets. If your Nest Egg is worth $1mm and you maintain a 60/40 EQ/FI allocation, you could move $228k into stocks from bonds and still have your new 60/40 allocation. Historically, this should increase your CAGR.
Until Congress "fixes" Social Security, people will be rightly concerned about when the SS Trust Fund goes "broke". Many don't see Congress letting that happen and many solutions exist. One simple one is using other tax revenue to pay the benefits. Here is a link to 20 commonly discussed solutions.
When to start collecting Social Security is a very individualized decision as there are factors, in combination, that make us unique. Add in a spouse and that could double the factors involved. Despite the hours spent crunching "the numbers", for most of those reading this article, there is no "wrong time" to start as much as there is no "perfect time" to start.
This article was written by
Retired Investor has been investing since the 1980s and has a background in data analysis and pension fund management. He writes articles to help others prepare for retirement by investing in CEFs, ETFs, BDCs, and REITs. He is a long only investor and shares strategies for trading options with a focus on cash-secured-puts.He is a contributing author to the investing group Hoya Capital Income Builder. Hoya specializes in the portfolio management of publicly traded real estate securities and dividend ETFs. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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