"Choice Architecture" and Social Security

[RetireBy90]

Read an interesting article at
https://www.marketwatch.com/story/why-theres-so-much-drama-about-when-to-claim-social-security-2020-06-25?


Basic it says the question you ask about when to take SS can control the answer.

You get one answer if you frame the issue in terms of how long soon-to-be retirees must live before they make up the income they lose by not claiming their Social Security benefits at age 62. And you get quite another if you frame the issue in terms of how much less their monthly payment will be if they start receiving benefits before reaching the maximum retirement age of 70.

Try asking yourself the 2 questions and see if your answer changes, at least somewhat. I've always asked 2nd question and plan to take at 70 to get max benefit, but asking the other way does change my thinking somewhat. I know there are many on the board that take one side and many the other.

From a study on "choice architecture"

To understand their findings, it’s worth remembering that the Social Security Administration (SSA) has set the magnitude of Social Security benefits to be actuarially equivalent no matter when you decide to begin receiving benefits. If you claim your benefits at age 62, the first year in which you’re eligible, you will receive payments over a longer period of time but at a reduced rate. If you instead claim at age 70, the age by which you must begin receiving benefits, your monthly payments will be commensurately higher.

Just found it interesting and perhaps useful in looking at my answer to these kind of questions.

 

[Markola]

Those are frequently the two poles of the discussion, so fasten your seatbelts for what transpires on this post. Maybe a third way to consider: I always thought waiting until 70 is obviously the way to go. I’m wealthy because I’m skilled at delayed gratification! However, I recently plugged into the Personal Capital retirement calculator age 62 for us both with the lower amounts and it greatly helps our portfolio survivability rate to have those dollars coming online sooner. Our financial planner says we’ll choose to take it based on what everything is looking like when we get into our 60s, which is probably the best answer.

 

[racy]

"the Social Security Administration (SSA) has set the magnitude of Social Security benefits to be actuarially equivalent no matter when you decide to begin receiving benefits".

...if you die on schedule.

Try the option to input your date of death in the Advanced Options, Mortality Tables at https://opensocialsecurity.com/.

 

[jazz4cash]

It’s always good to have a choice vs having no choice. There’s no right or wrong and optimum can only be determined looking backwards. Do what feels right for your situation and don’t fret over it.

 

[Dtail]

The actuarial SS tables haven't been updated in awhile and thus "actuarial neutral" is probably not quite correct and understates the benefits of delaying to a small extent.

 

[donheff]

I don't get SS and will not get a spousal benefit if DW dies. We would have taken her SS at 62 but we were blocked because she continued to have K1 income from her former employer. She took it at 66 rather than 70 for two reasons: get as much out as possible in case she dies before I do; get a few years of SS out before tax brackets kick up due to her RMDs and reduce the SS payments taxed at the higher rate for the remainder of her life.

 

[RetireBy90]

Just to attempt a small course correction, point of article was that the way the question on choice is asked can affect your answer. When to take SS is only an example of the principle they claim to have found. Consider if the question was about which of 2 cars to buy, a Subaru that has highest safety ranking and a Mustang. If you were asked how much more would you pay for a car that is safer you would be likely to say the price of a Subaru was worth it. If you were asked about how much more you would pay for the performance and sexy styling of a Mustang you may be likely to say price of the Mustang was worth it.


Just one more insight like recency bias where you tend to give more importance to recent events than those farther back in time. For example, the sharp correction off recent market lows tend to be more important to your decisions than the many long bear markets we have experienced.

 

[ShokWaveRider]

And do not forget the ACA limits for subsidies. That is the largest bearing on us not taking our SS. That could change next year though. It is an annual decision every November/December for us whether or not to take it.

 

[Rianne]

"the Social Security Administration (SSA) has set the magnitude of Social Security benefits to be actuarially equivalent no matter when you decide to begin receiving benefits".

...if you die on schedule.

Try the option to input your date of death in the Advanced Options, Mortality Tables at https://opensocialsecurity.com/.

I just discovered this feature: Plug in at "Mortality Table" an assumed year of death. For example: I plugged age of death 75 for both of us. We're 62 now, born 3 months apart. SS suggests we file now, this month (June). Both of us. The combined benefit starting this year $21,143, combined benefits in 2021, $36,244. Our combined benefit at FRA is $45,632.
But! Benefit gained if we claim FRA and die at 75 is $122,000. If we claim now and die at 75 benefit gained is $130,000. Am I doing this right? It's all in the crystal ball.

 

[skipro33]

Dying rich then, is the goal of delay taking SS? Add to that; you don't really build that wealth until after age 70? I don't get it.

I'd much rather have some money at that stage of retirement where I'm relatively healthy and able to get the most bang for my buck in regards to enjoyment of using the money than to postpone just to have a larger check and surely less health and ability to enjoy. When choosing to take SS, don't just be the bean counter. Instead try to actualize the value to your personal happiness it provides. After all, there's only so much money you can enjoy at any given stage in life. Other than unforeseen emergency, I'm pretty sure I'm able to enjoy my wealth at an earlier age than later in life.

 

[Dtail]

I just discovered this feature: Plug in at "Mortality Table" an assumed year of death. For example: I plugged age of death 75 for both of us. We're 62 now, born 3 months apart. SS suggests we file now, this month (June). Both of us. The combined benefit starting this year $21,143, combined benefits in 2021, $36,244. Our combined benefit at FRA is $45,632.
But! Benefit gained if we claim FRA and die at 75 is $122,000. If we claim now and die at 75 benefit gained is $130,000. Am I doing this right? It's all in the crystal ball.

Are you using the default real discount rate? This input can change the results decision by a reasonable number of years.

 

[jkern]

A benefit that you don’t get because you waited, then died, seems like no benefit at all. If it is really based on actuarial tables, why not take it and invest it yourself? At least if you have heirs, they would get something. Another reason for not waiting is that SS is *not* guaranteed, at all, from what I understand. I agree that in most cases it is unlikely that Congress would change it drastically, but a future socialist president and Congress could very well decide we have “too much”.

I believe legislation risk is a huge factor that's mostly swept under the rug.

 

[bobbyr]

i turn 62 soon and am signing up for ACA in December (end of cobra). SS income would potentially take me out of the ACA credit zone I am shooting for. I would be tempted to start taking it otherwise.

It's nice to have a reason like that to guide me, it saves me $1450/month ACA credit by waiting.

 

[ERD50]

...
Just found it interesting and perhaps useful in looking at my answer to these kind of questions.

I would say that if the article does not cover the concepts of "longevity insurance" and the benefits to a surviving spouse, then it is less than useful, it is harmful.

-ERD50

 

[walkinwood]

I would say that if the article does not cover the concepts of "longevity insurance" and the benefits to a surviving spouse, then it is less than useful, it is harmful.

-ERD50

I think that's the point the OP is making. Decisions depend on the question being asked. For us, we ask - "When should we take SS to get us the most longevity insurance?"

We can prioritize this question today because our retirement is well funded without SS. Ask me next year and the priority question may be "When should I take SS to extend the longevity of my portfolio?"

I think this is one of those decisions that have to be revisited each year from when you're eligible to when you file.

 

[Rianne]

Are you using the default real discount rate? This input can change the results decision by a reasonable number of years.

Yes, I used the default real discount rate. What should I change it to for better accuracy?

 

[Dtail]

Yes, I used the default real discount rate. What should I change it to for better accuracy?

Based on historical information for returns and inflation, some folks use a conservative net real % of 2.7%.

 

[RunningBum]

I think that's the point the OP is making. Decisions depend on the question being asked. For us, we ask - "When should we take SS to get us the most longevity insurance?"

We can prioritize this question today because our retirement is well funded without SS. Ask me next year and the priority question may be "When should I take SS to extend the longevity of my portfolio?"

I think this is one of those decisions that have to be revisited each year from when you're eligible to when you file.

There was a link to other questions to ask yourself, but unfortunately it was a local link (C:\User\something) so only the author could read it on his own PC. Not too impressive.

I fully agree on the longevity question, and reviewing your decision often, when eligible. The answer to longevity insurance is not necessarily to delay until 70, but it seems to me in most cases it is.

 

[gregable]

Longevity insurance is a strong reason to wait until 70. ACA subsidy is a good reason to wait until Medicare kicks in at 65, for some.

Poor health is a good reason to start early. The actuarial table bit isn't perfect because the actual delayed benefit is perfectly linear while survival rates are not.

If you want to get particular, there are actuarial data available for smaller groups than all Americans. For example men live shorter. Smoking, obesity, even income correlates with survival rate. Race as well. African Americans have a 3.5 year shorter expected lifespan, making benefits for that group smaller than Americans as a whole.

I typically recommend waiting until 70 for the longevity insurance angle, unless you are very unhealthy or can't afford to wait.

 

[Markola]

I think this is one of those decisions that have to be revisited each year from when you're eligible to when you file.

+1. My comfort level has become using the date that makes the retirement calculators work most successfully, then when 62 arrives, see where one actually is and take it year by year based on the totality of factors I can’t predict right now.

 

[rodi]

There is no "one" answer that is right for everyone.

Some people need the money sooner to maintain their quality of life. And with the idea that spending goes down as you get older - the answer will probably work well for them.

Other people have a lot of longevity in their, or their spouse's family... so delaying means more money.

The whole spouse thing: age difference between spouses, SS income between spouses, whether there's a spouse in the picture, etc... All are individual factors in the decision.

Lets not forget the tax torpedo of RMDs and big SS payments... That might factor into some folks decision.

Hubby started collecting at 62 because we had minor age children who would get a benefit as well.... That tilted the financial decision pretty significantly to claiming early.

I still have 3.5 years till I could claim at 62... I'm of the mindset that I'll make the decision based on financial/tax considerations/etc that exist at the time. If things stay static I'll delay for a bit while I continue to Roth convert.

 

[Perryinva]

Isn’t almost ANY financial (as well as many others, such as the car question) based on what question is asked and what that answer is? Am I missing something here?

The only real difference is what ever is most important to you at the time.

When to file for SS has been beaten to death because of what questions appear most important. Purely financial is based on an assumed age of expiration and whether that early income is more useful now vs later.

Anyone that uses the old “it’s more useful now than later” typically needs the money now and doesn’t see anybenefit in a higher income/preferred tax liability later.

It always boils down to a few reasons, and how important they are as well as the relative worth compared to your income.

Someone with $10M and $400k/yr income has no reason to delay. Any decision they make is practically moot.

Any single person with a healthy portfolio and a small amount of early SS, say $12k/yr, has little reason to delay, as the delayed amount differential isn’t going to make much difference in their lifestyle, or to anyone else if they make the wrong decision.

A married couple with a high percentage of their retirement income based on whether the high earner is alive, and a large early SS (say $30k/yr) has more reason to delay as that amount would be $48-50k @70. Throw in ACA & Roth conversion and “take it early so you can enjoy it now” is down right stupid.

Longevity insurance has already been mentioned as well as annuity income vs investment income.

So OF COURSE it depends on what questions are asked/more important to you.

 

[atmsmshr]

There is no "one" answer that is right for everyone.

Some people need the money sooner to maintain their quality of life. And with the idea that spending goes down as you get older - the answer will probably work well for them.

Other people have a lot of longevity in their, or their spouse's family... so delaying means more money.

The whole spouse thing: age difference between spouses, SS income between spouses, whether there's a spouse in the picture, etc... All are individual factors in the decision.

Lets not forget the tax torpedo of RMDs and big SS payments... That might factor into some folks decision.

Hubby started collecting at 62 because we had minor age children who would get a benefit as well.... That tilted the financial decision pretty significantly to claiming early.

I still have 3.5 years till I could claim at 62... I'm of the mindset that I'll make the decision based on financial/tax considerations/etc that exist at the time. If things stay static I'll delay for a bit while I continue to Roth convert.

+1

Add: Depends also on legacy goals, the age difference between spouses, wage income history, if SSDI is being collected, pension and asset base.

 

[deserat]

It always boils down to a few reasons, and how important they are as well as the relative worth compared to your income.

Someone with $10M and $400k/yr income has no reason to delay. Any decision they make is practically moot.

Any single person with a healthy portfolio and a small amount of early SS, say $12k/yr, has little reason to delay, as the delayed amount differential isn’t going to make much difference in their lifestyle, or to anyone else if they make the wrong decision. ....

So OF COURSE it depends on what questions are asked/more important to you.

Your point is very relevant to me. I have been running several different retirement calculators and have realized the difference between taking SS at FRA it 70 does not affect my overall spend or withdrawal rate over a 35-40 year span. I have come to the realization that decisions I made 20-30 years ago with regard to how much to save each year (mostly maximize tax deferred along with employer match as well as save beyond that if possible) as well as the decision to stay a Reservist until the particular grade/longevity walls hit will have more of an impact on my spending ability than SS and when I take it.

I am so very fortunate and yet as I look back, I wasn't necessarily making some of those decisions with the insight nor possibilities I realize I have now.

Any COLA adjusted pension or annuity takes pressure off portfolio performance for possible spending limits. For some, that annuity is their only means.

Back to your point, where timing becomes most important is in the middle of the algorithm; the outside edges (other income/large portfolio or no other income) timing has much less a weight in overall desired outcome of resources available to spend. In my case the range is lower than $10M/$400K, much lower, but not shabby either. That's also being single so largest tax hit as well.

 

[Audie Murphy]

I plan to take it ASAP when I reach age 62. Because it is an actuarial coin flip and there is no guarantee on how long I will live and that old adage, a bird in the hand is worth two in the bush. Add that we have planned and saved and delayed and prepared with 401K's and Roth’s and should have plenty of nest egg to meet late life needs. Then the final hammer to the nail of taking it early would be this excellent article that I think someone posted on here that I will share again...

https://fersguide.com/wp-content/uploads/2019/07/Social-Security-Now-or-Later.pdf

Taking it at 62 is such a no-brainer that anything else makes my head hurt. That is just me though.