Another reason to claim Social Security at 62

[petfer]

Isn't it a misconception that your SS benefits are inflation protected? Your projected break even year various models suggest might not be realistic, if your personal inflation rate is much higher than your annual COLA increase. Looking at my spreadsheets for the last couple years, even just for the non-discretionary expenses (property tax, health and various other insurances, utility bills etc.) it becomes clear that my social security benefits loosing at least 6-8% value, annually, even after COLA adjustment. Considering this my break even year would have been later than expected. More out of sync your are with the officially declared CPI-W, later you would break even, while starting your benefits at 62. During inflationary times it seems that earlier your claim more actual purchasing power you are able to retain. Do I miss something?

 

[RetiredHappy]

Everyone has their own inflation metrics as our expenses differ from one another. SS COLA is based on their defined basket of goods. The breakeven is about 80 yo regardless of whether you claim at 62, FRA or 70. If you live beyond 80, then claiming at 70 will provide you larger total return. Claiming at 62 will forever keep your SS benefits smaller, other than getting COLA adjusted each year. You might as well claim at 70.

 

[TheWizard]

Ho hum...

 

[G POP]

The utility of your $ as you get older is something not talked about enough in my opinion. Go-Go, Slow go and No Go years. If I asked Warren Buffett to be 20 years old but he would have a net worth of 10k or continue to be his current age with his current net worth, he would choose the latter all day long. I don't care if I somehow have more money coming in at age 82 because I waited to draw at 70. So, your wheelchair in the old folk's home will be a bit nicer than mine. Great. Less $ at 62 is of greater value to me than more $ at 82. Full disclosure: My current plan is to draw SS at age 65. Also disclosed is the fact that I'm fine if I never receive a penny of SS $. My first world problem will be too much income at that age.

 

[Midpack]

During inflationary times it seems that earlier your claim more actual purchasing power you are able to retain. Do I miss something?

False. Soc Sec breakeven has nothing to do with your personal inflation rate. Breakeven tells you at what age you should take Soc Sec based on your longevity assumptions. Your monthly benefit increases as much as 8% for each year you wait to claim from FRA to 70, a little less from age 62 to FRA. COL increases your monthly benefit no matter when you claim. Personal inflation rate reduces the value of your Soc Sec COLA no matter what age you claim, but if you live longer than breakeven you’ll be very glad you waited as your monthly benefit will be much higher every year than if you claimed at 62.

 

[Texas Proud]

What Midpack said... but just to be clear... your expenses do not come into the calculation for breakeven...

 

[Gumby]

Once you are 62, the COLA applies to your Primary Insurance Amount (PIA), which is the amount you get at your Full Retirement Age (FRA), regardless of whether you are currently taking social security or not, so it is a simple mathematical formula and you need know only two pieces of data

1. If you were born in 1960 or later, your FRA is 67 and if you take Social Security at 62, you get 70% of your PIA.

2. If you wait to take social security until after your FRA of 67, you get a boost over your PIA of 8% per year until you are 70, which means if you wait to 70, you get PIA x 1.24 (there is no compounding)

You want to determine the break even point, which is where the amount you get when you wait equals the lesser amount you get by taking early for a greater number of years. If you live past that age, you benefit by waiting. One thing to note about all of these equations is that PIA is on both sides, so the actual amount of your PIA is irrelevant, which means that the COLA is irrelevant.

A. Let's start with the decision to take at 62 versus taking at FRA of 67.
PIA = amount received at 67; T = years after 67:

PIA x T = 0.7PIA x (T+5)
T = 0.7T + 3.5
0.3T = 3.5
T= 3.5/0.3 = 11.67 years

So you break even at age 78 years and 8 months.

B. Now let's look at taking at 67 versus taking at 70
PIA = amount received at 67; T = years after 67

PIA x T = 1.24 PIA x (T-3)
T= 1.24 T - 3.72
-0.24T = -3.72
T=3.72/0.24 =15.5 years

So you break even at age 82 years and 6 months

C. Finally, let's look at taking at 62 versus waiting until 70
PIA = amount received at 67; T = years after 70

1.24 PIA x T = 0.7 PIA (T+8)
1.24 T = 0.7T + 5.6
0.54T = 5.6
T = 5.6/.54
T = 10.37 years

So you break even at age 80 and a little over 4 months

 

[Lorenzo]

The utility of your $ as you get older is something not talked about enough in my opinion. Go-Go, Slow go and No Go years. If I asked Warren Buffett to be 20 years old but he would have a net worth of 10k or continue to be his current age with his current net worth, he would choose the latter all day long. I don't care if I somehow have more money coming in at age 82 because I waited to draw at 70. So, your wheelchair in the old folk's home will be a bit nicer than mine. Great. Less $ at 62 is of greater value to me than more $ at 82. Full disclosure: My current plan is to draw SS at age 65. Also disclosed is the fact that I'm fine if I never receive a penny of SS $. My first world problem will be too much income at that age.

That is definitely a consideration. I have long thought I would claim at 62 to help fund my outdoor adventure hobbies--activities which I will be unable or at least unwilling to continue to engage in by my late 60s, maybe 70. But with age 62 staring me in the face now, and having read all I have read on this forum and elsewhere, and having played with the SS strategy tools, etc, I am no longer so sure I can't wait until FRA (67). With my spending level, calculators such as Firecalc suggest I will be spending down to zero over 30 years without SS factored in. For me, it seems SS will play a major role in making sure I don't run out of money late in life.

 

[Cayman]

Thanks Gumby. Very helpful and easy to understand. I'll share this with my sibling.

 

[easysurfer]

My strategy is I'm healthy enough (knock on wood) to shoot for claiming social security at 70. That's my formula.

 

[Koolau]

We've been through this (and other permutations) "when to take SS" many times before. It's not quite as simple as break even or inflation adjustments. There are some quirks that potentially make waiting advantageous (in my case, DW will get my larger payment when I'm gone instead of her smaller payment now.) This was intentional on our part. It's not for everyone. Waiting also gives you more time to make ROTH conversions but YMMV.

 

[jazz4cash]

I am with Midpack too. I never accepted payback age as a good way to analyze. Postponing yields 8% increase per year vs. whatever CPI-W increase formula yields (will never be 8% yr over yr). It’s all very personal and almost no one is truly “average”. Inflation adjustments rarely totally match an individuals personal rate. Plus, they don’t it take back if expenses deflate. Hold out if you can but take it when you need it.

 

[pb4uski]

Isn't it a misconception that your SS benefits are inflation protected? Your projected break even year various models suggest might not be realistic, if your personal inflation rate is much higher than your annual COLA increase. Looking at my spreadsheets for the last couple years, even just for the non-discretionary expenses (property tax, health and various other insurances, utility bills etc.) it becomes clear that my social security benefits loosing at least 6-8% value, annually, even after COLA adjustment. Considering this my break even year would have been later than expected. More out of sync your are with the officially declared CPI-W, later you would break even, while starting your benefits at 62. During inflationary times it seems that earlier your claim more actual purchasing power you are able to retain. Do I miss something?

No, not a misconception at all. If your personal inflation is less than the SS COLA then you come out with more spending power and vice versa. And the same would apply if you take SS at 62 or 70 or anywhere in-between.

P.S. and it is losing, not loosing.

 

[pb4uski]

What Midpack said... but just to be clear... your expenses do not come into the calculation for breakeven...

And the proof of that is that expenses or your personal rate of inflation are NOT elements of the optimum claiming strategy analysis at opensocialsecurity,com

 

[Gumby]

I am with Midpack too. I never accepted payback age as a good way to analyze. Postponing yields 8% increase per year vs. whatever CPI-W increase formula yields (will never be 8% yr over yr). It’s all very personal and almost no one is truly “average”. Inflation adjustments rarely totally match an individuals personal rate. Plus, they don’t it take back if expenses deflate. Hold out if you can but take it when you need it.

1. The 8% per year bonus from 67 to 70 applies to your PIA, which is also increased by the COLA during those years, whether you are drawing social security or not.

2. You can never get a negative COLA if there is deflation. You just get zero COLA.

3. Irrelevant given the above, but CPI-W most certainly could increase by more than 8% in a year. 3rd quarter CPI-W, which is the relevant measure, went up by over 12 % each year in 1979 and 1980.

 

[pb4uski]

That is definitely a consideration. I have long thought I would claim at 62 to help fund my outdoor adventure hobbies--activities which I will be unable or at least unwilling to continue to engage in by my late 60s, maybe 70. But with age 62 staring me in the face now, and having read all I have read on this forum and elsewhere, and having played with the SS strategy tools, etc, I am no longer so sure I can't wait until FRA (67). With my spending level, calculators such as Firecalc suggest I will be spending down to zero over 30 years without SS factored in. For me, it seems SS will play a major role in making sure I don't run out of money late in life.

But if you have the money to claim later you get more years in lower tax bracket to do either low tax cost Roth conversions or low tax cost withdrawals. Money is fungible so it doesn't matter if your outdoor adventure hobbies are paid for by SS or by retirement savings withdrawals.

I took FIRECalc and used the default assumptions and added $30k of PIA at ages 62, 67, 68, 69, 70 and solved for safe spending using the Investigate tab and got the following results:

Age 62, $21,000 annually beginning in 2024, safe spending is $51,288
Age 67, $30,000 annually beginning in 2029, safe spending is $53,895
Age 68, $32,400 annually beginning in 2030, safe spending is $54,181
Age 69, $34,800 annually beginning in 2031, safe spending is $53,884
Age 70, $37,200 annually beginning in 2032, safe spending is $53,690

Seems pretty clear that claiming at 62 is suboptimal assuming that your retirement is the 30 years assumed.

 

[Koolau]

I am with Midpack too. I never accepted payback age as a good way to analyze. Postponing yields 8% increase per year vs. whatever CPI-W increase formula yields (will never be 8% yr over yr). It’s all very personal and almost no one is truly “average”. Inflation adjustments rarely totally match an individuals personal rate. Plus, they don’t it take back if expenses deflate. Hold out if you can but take it when you need it.

Yeah, that was always my back-up position. I had planned on age 70, but at any moment if I changed my mind (suddenly needed more income) I could have applied and started receiving monthly income within 3 months or less. The flexibility was good to have though YMMV.

 

[Lorenzo]

But if you have the money to claim later you get more years in lower tax bracket to do either low tax cost Roth conversions or low tax cost withdrawals. Money is fungible so it doesn't matter if your outdoor adventure hobbies are paid for by SS or by retirement savings withdrawals.

The difficulty is being certain I "have the money," as the outdoor adventure costs are not fixed. Sure, I could conservatively budget a certain amount annually and strictly adhere to the budget to be certain I could pay for these activities using retirement savings alone, but that might foreclose some great opportunities that cost just a little more than the budget. In other words, for someone whose budget is tight at retirement due to an active lifestyle that they will not be able to sustain for that many years and wants their lifestyle to transition as painlessly as possible into a "go-go" phase of retirement, taking SS at 62 might provide the flexibility/cushion to do that. Thoughts?

 

[mountainsoft]

Less $ at 62 is of greater value to me than more $ at 82.

I agree with that to a point. Once you reach the "slow-go" years medical costs tend to go up and you might wish you had the additional income. The typical "spending smile", high in the beginning, low in the middle, high again at the end.

My wife and I are both planning to take SS at 62, but depending on where we are financially at the time we might postpone it a year or two. Yes, delaying SS increases my benefit, but it means we would need to spend more of our retirement savings. The way I see it, SS ends when I die, but our savings can be passed on to our daughter. Also, if we spend down our savings and rely on SS/Pension alone, we would have a fixed income. If some major expense came up (home/medical/etc.) we would be out of luck. I would rather have a smaller SS benefit and have a savings buffer as a safety net. Our situation might be unique in that my wife has a great pension that covers the majority of our expenses. So maxing out SS benefits isn't a huge priority. Pension and age 62 benefits will cover our needs, and we won't need to touch our savings after that point unless an emergency comes up.

 

[Trailwalker]

Expenses during the no-go phase can be higher than expected with less control (health-related). I look at my mother, age 85, and her expenses in the no-go phase are picking up steam. This is happening at the same time that she is partially reliant upon my recently deceased father's social security.

We plan to wait until at least until full retirement age for SS because we can and then make an annual decision on what to do after that. The wild card is that the rules may change, and there's no way to accurately predict how they will change.

 

[ElizabethT]

As I just posted elsewhere - I applied for early, age 62 benefits this spring, but my benefits won't begin to be paid until two months after my 62 birthday. Apparently there is a little technicality for early age 62 filers, that does not apply at any other post-62 filing situation - you have to be age 62 for a full month before you can file, so your benefits don't actually begin until two months after your 62nd birthday. Yeah, that was a surprise in spite of having spent a lot of time trying to figure out how and when to file.

 

[Gumby]

You also have to be alive for an entire month to get benefits for that month. If you die on the second to the last day of the month and get a check next month on whichever Wednesday is yours (you only get paid for a month after the month is over), your estate will have to pay it back.

 

[Murf2]

Expenses during the no-go phase can be higher than expected with less control (health-related). I look at my mother, age 85, and her expenses in the no-go phase are picking up steam. This is happening at the same time that she is partially reliant upon my recently deceased father's social security.

We plan to wait until at least until full retirement age for SS because we can and then make an annual decision on what to do after that. The wild card is that the rules may change, and there's no way to accurately predict how they will change.

Trailwalker, if you don’t mind . What medical expenses do you see increasing that are not covered by Medicare?
Thanks!

 

[pb4uski]

The difficulty is being certain I "have the money," as the outdoor adventure costs are not fixed. Sure, I could conservatively budget a certain amount annually and strictly adhere to the budget to be certain I could pay for these activities using retirement savings alone, but that might foreclose some great opportunities that cost just a little more than the budget. In other words, for someone whose budget is tight at retirement due to an active lifestyle that they will not be able to sustain for that many years and wants their lifestyle to transition as painlessly as possible into a "go-go" phase of retirement, taking SS at 62 might provide the flexibility/cushion to do that. Thoughts?

I guess it depends on how well funded your retirement is. But let's follow my example above of $21,000 SS at 62 and $37,200 SS at age 70 [$21,000 = $30,000 PIA * 70%; $37,200 = $30,000 PIA * (1+8%*(70-67))].

So eight years of SS of $37,200 annually at 70 is $297,600. So use $297,600 from your stash to buy an 8-year Treasury or CD ladder with $37,200/rung that provides a phantom age 70 SS benefit for ages 62 to 70, then SS takes over.

Take a 3.75% or 4% WR on the rest of your stash. It is better than taking SS at 62.

To extend the previous example in FIRECalc, reduce the $750,000 default portfolio balance by $297,600. Add SS of $37,200 starting in 2024 rather than 2032... for the first 8 years that cash flow comes from the $297,600 put aside and thereafter is from age 70 SS. Any COLA increases are covered by interest on the $297,600. The safe spending is $55,470, actually a little better than claiming SS at 70.

You can get the same result by starting with $37,200 of SS in 2032 then a COLAed pension of $37,200 starting in 2024 and an off-setting COLAed off-chart-spending starting in 2032.

 

[Trailwalker]

Trailwalker, if you don’t mind . What medical expenses do you see increasing that are not covered by Medicare?
Thanks!

Without going into too much personal detail, my mother is on an Advantage Plan, and was a very low medical services user until recently. She thought it was a great deal. No medications, and only an annual physical. At 85, now there are conditions needing treatment, monitoring, and medication. Along with that, she is looking into assisted living, which is going to increase housing expenses significantly.