Theory Behind taking Social Security Early?

[Independent]

I'm planning to have my spouse claim at 62, me at 70. I like the longevity aspect for me (and even more so for my wife assuming I die first).

I find the "bank cash for the 62 - 70 period" to be pretty compelling. I'm already cautious in my outlook (50% stocks, 50% bonds+cash) so keeping 8 years worth of fixed-instrument money is not a problem.

I'll put aside (8 years)*(my age 70 benefit) in a CD ladder and as each CD matures I'll "claim" age 70 benefits starting at age 62. My stash will drop (obviously) but 4% of the remainder plus my age 70 benefit will be greater than 4% of the original.

For example, with a $2M stash and SS benefits of $40k @ 70; $22.7k @ 62, I can calculate I need 8*40k = $320k in a CD ladder and my stash reduces to $1.68M

4% of $1.68M = $67,200 plus my age 70 benefit from my CD ladder = $107.2k
Claiming at 62 without the ladder: 4% of $2M = $80,000 + age 62 benefit = $103k.

This $4k annual boost will help, I'll be better insulated from market drops and will not hesitate using each annual CD as it matures. The modest CD return will also help.

Fine plan. We did essentially the same thing. I used I-Bonds instead of CDs for the back end.

 

[Sunset]

My husband will be 62 in four years. We also have a minor child (I'm 12 years younger). The calculators I run tell us for him to collect at 70 and me to collect at 62. However, it seems like it's in our best interest for him to collect SS early because of that minor benefit. I read that it's half of the FRA, not half of what it would be at 62.
.

If his SS is significantly higher, I would think the calculators are correct. Assume he dies in 12 years (which is true if he is avg person). You will be exactly 62 and collect survivor benefit for rest of your life which (on avg) will be another 22 years.

If he died after 8 years, the benefit time is even longer.
Quite an insurance policy

 

[imoldernu]

Holy mackerel! 400 Posts.

We took SS at 62 in 1998... not thinking of the future, but what we were facing then. Nothing coming in and just our small savings and IRA, and healthcare costs of more than $10K. No question about "when"... we needed it "then"!

It was when CD interest rates were close to 5%, so we wanted to keep every dollar of capital.

No regrets. Don't know how much we've collected since then, but with me @ full and DW @ 1/2, currently getting $25K/yr. at age 82. It provides the base for our budget, so that our earlier plan to die at age 85, now looks like we can go to age 93.

 

[rayvt]

I see a lot of picking a conclusion and then coming up with arguments that sustain that conclusion. IOW, confirmation bias.

Since the SSA says that the payout is actuarially equivalent regardless of the age when you claim, it requires strong proof that 70 is substantially better than 62. The one thing that always comes out in these threads is that people assume they will live longer than average. You can hope you live longer than average, but you cannot assume it.

 

[braumeister]

What I think some might miss is that SS is actuarially neutral for the government but not necessarily for every individual. For those of us who grew up in Lake Wobegon, we're all above average.

 

[sengsational]

It is prudent to presume you live on the long side of the bell curve in exercises like this. I know that my planning horizon is very likely way beyond where I'll die, but, as mentioned many times, the discomfort associated with running out of money is much worse than the pleasure of another couple of percent.


As to the idea of alignment of facts to support a pre determined result, I agree there is a lot of that here. Some of it is cognative dissonance avoidance, since the determination has already been made and there's the need to "prove" it was the right thing to do. For instance, someone who just now took SS at 70, and is in poor health. If they'd taken it at 62 and put it in equities, they'd be way ahead... they'd have to live past 100 since the market over the last 8 years has been so profitable.

 

[ERD50]

I see a lot of picking a conclusion and then coming up with arguments that sustain that conclusion. IOW, confirmation bias.

Since the SSA says that the payout is actuarially equivalent regardless of the age when you claim, it requires strong proof that 70 is substantially better than 62. The one thing that always comes out in these threads is that people assume they will live longer than average. You can hope you live longer than average, but you cannot assume it.

What I think some might miss is that SS is actuarially neutral for the government but not necessarily for every individual. For those of us who grew up in Lake Wobegon, we're all above average.

It is prudent to presume you live on the long side of the bell curve in exercises like this. I know that my planning horizon is very likely way beyond where I'll die, but, as mentioned many times, the discomfort associated with running out of money is much worse than the pleasure of another couple of percent.


As to the idea of alignment of facts to support a pre determined result, I agree there is a lot of that here. Some of it is cognative dissonance avoidance, since the determination has already been made and there's the need to "prove" it was the right thing to do. For instance, someone who just now took SS at 70, and is in poor health. If they'd taken it at 62 and put it in equities, they'd be way ahead... they'd have to live past 100 since the market over the last 8 years has been so profitable.

I agree with both of the above responses to rayvt. I'll throw in one more analogy/illustration:

Say you have a 100 mile trip to make, 5 gallons of gas in your car, and you average 20 mpg in your car. Are you fine, counting on the average, or do you want some 'insurance', and add to your tank?

Another thing, I believe (pls correct me if I'm wrong), that SS is actuarially equivalent for a single person. If a spouse can collect survivor benefits, it moves that equivalency.

-ERD50

 

[Cut-Throat]

For instance, someone who just now took SS at 70, and is in poor health. If they'd taken it at 62 and put it in equities, they'd be way ahead... they'd have to live past 100 since the market over the last 8 years has been so profitable.

Hindsight is always 20/20 "If I would have bought Microsoft Blah, Blah. Blah"....


It's like the guy that is lying on his deathbed lamenting the fact that he wasted all his money on Fire Insurance and he never had a fire.
He could have put all that money into equities and he'd be way ahead by now.....

 

[samclem]

What I think some might miss is that SS is actuarially neutral for the government but not necessarily for every individual. For those of us who grew up in Lake Wobegon, we're all above average.

+1. With a huge sample size, the early and late SS choices are a wash. But that's not very useful to each person, as it disregards individual longevity (which we each have some insight about in our own case, if nothing else the gender differences make waiting better for females than males). And, as ERD50 mentions, there is the issue of survivor benefits, which is very unlikely to be baked into the cake (Though I don't know for sure. It would require a lot of analysis of spousal ages vs income, etc).

More fundamentally, all of this "$$ from SS if taken early vs $$ from SS if taken later" answers the "wrong" question (IMO). We should be trying to maximize the overall >utility< of our SS income stream, not the expected number of dollars. They aren't the same thing, but too often they are treated as the same thing by simplistic "break even" calculators.

 

[pb4uski]

I see a lot of picking a conclusion and then coming up with arguments that sustain that conclusion. IOW, confirmation bias.

Since the SSA says that the payout is actuarially equivalent regardless of the age when you claim, it requires strong proof that 70 is substantially better than 62. The one thing that always comes out in these threads is that people assume they will live longer than average. You can hope you live longer than average, but you cannot assume it.

I could not disagree more. I can assume that I will live longer... I have longevity in my family (88 yo mother, grandmother lived to 98), I am upper income and have regular checkups, I am retired so I have less stress than if I was working, I get a fair amount of exercise, I am happily married, have never smoked, and a host of other factors. Will I live longer? Who knows... but the odds are good.

While SS may be actuarially neutral for a single life, joint mortality is very different so for married couples where one was a much higher earner the math is very different from a single person. Finally, the discount and premium factors for taking early or late were set a long time ago and there have been mortality improvements since then.

One of the authors' key observations is that even if the benefit adjustment for delaying benefits is fair on average from an actuarial point of view, in the sense that the average person gets the same net present value of Social Security benefits no matter when he chooses to start taking benefits, the adjustment won't be actuarially fair for everyone. For example: those who don't expect to live a long time would benefit by claiming benefits early; those who expect to live a long time would be better off delaying.

A "delay" strategy is particularly beneficial for married couples. The primary earner can delay claiming benefits, while the secondary earner takes benefits early. If the secondary earner outlives the primary earner, he or she gets to step up to the primary earner's benefits. That strategy helps married two-earner couples most, but married one-earner couples also benefit. "Delaying the primary earner's benefit is equivalent to purchasing a second-to-die or joint life annuity," the authors write. "In contrast, a single person who delays claiming only receives a single life annuity based on his or her own earnings record."

 

[joeea]

Another thing, I believe (pls correct me if I'm wrong), that SS is actuarially equivalent for a single person.

Almost.

It's actuariailly neutral for the average person. But not necessarily for any real individual person.

 

[Independent]

We should be trying to maximize the overall >utility< of our SS income stream, not the expected number of dollars. .

Yes.

If we merely looked at expected dollars, we'd never buy private insurance. We know that the total number of dollars that insurance companies pay out in claims is less than the total (time adjusted) dollars they collect in premiums. (My dad used to say "we know they spend money on big office buildings".)

Economists say that buying insurance can be rational anyway, because the utility of the claims dollars can be higher than the utility of the premium dollars.

We also know that if we have "enough" money, insurance isn't so attractive. I have enough to carry substantial deductibles on by home and auto insurance. I have enough to drop my term life entirely.

The when-to-take-SS decision often seems to correlate with individual wealth.

 

[joeea]

The when-to-take-SS decision often seems to correlate with individual wealth.

It does?

Other than those who don't have enough wealth to get by and are forced to take SS as soon as possible, I haven't seen any correlation at all.

Can you elaborate?

 

[Fedup]

Speaking of life insurance, I still have term life insurance. So far, I’ve paid like $20k total, maybe $40K total for my husband once he gets to 80. Not a bad trade off for $750k life insurance. As MathJack on CD posted, unless one lives until very old age, then it might not work out. I was thinking of dropping at 60, then I’ve read widows benefit is best maxed at 62.5 for max 82.5 of my spouse. But then I keep reading more and I think it could replace as Long term insurance for me, which I dropped last year.
I know, I’m getting off topic here.

 

[joeea]

Speaking of life insurance, I still have term life insurance.

But then I keep reading more and I think it could replace as Long term insurance for me, which I dropped last year.

What do you mean by "Long term insurance"?

If you meant "Long Term Care Insurance" wouldn't someone have to die first for that to be viable?

 

[pb4uski]

Almost.

It's actuariailly neutral for the average person. But not necessarily for any real individual person.

I think his point is that while it may be actuarial neutral for a single life, it is not actuarial neutral for a couple because of joint mortality.

Based on the SOA's Longevity calculator at http://www.longevityillustrator.org/ , there is a 50% chance that I will live another 23 years... to age 86... and that DW will live another 26 years... to age 89... but it is also 50% likely that one or the other of us will live another 29 years... to age 92 given that the undiscounted breakeven point is probably about 82.

Since I was the higher wage earner and have a higher SS benefit, it is 50% likely that one or the other of us will receive that benefit from whenever I begin drawing it until age 92.... that changes the delay or decision not math significantly.

 

[NW-Bound]

... While SS may be actuarially neutral for a single life, joint mortality is very different so for married couples where one was a much higher earner the math is very different from a single person.

When I try to explain to my wife the reason for delaying my SS until 70, that she is more likely to outlive me, particularly as I could have died from a serious illness a few years ago (I am OK now after surgery), she got defensive.

She says it is just as likely that she will die before me. I think she would feel survivor's guilt.

 

[pb4uski]

It does?

Other than those who don't have enough wealth to get by and are forced to take SS as soon as possible, I haven't seen any correlation at all.

Can you elaborate?

I think that is what Independent was referring to.... statistically, a large majority of people take SS at 62... in most cases because they have no other choice. Having money gives you choices.

I have a friend like that... has less than a year or tow of living expenses saved for retirement. When he retires, he'll have no choice but to start SS right away.

 

[pb4uski]

When I try to explain to my wife the reason for delaying my SS until 70, that she is more likely to outlive me, particularly as I could have died from a serious illness a few years ago (I am OK now after surgery), she got defensive.

She says it is just as likely that she will die before me. I think she would feel survivor's guilt.

Show her the longevity calculator above and perhaps it will help her understand.

 

[kgtest]

I think that is what Independent was referring to.... statistically, a large majority of people take SS at 62... in most cases because they have no other choice. Having money gives you choices.

I have a friend like that... has less than a year or tow of living expenses saved for retirement. When he retires, he'll have no choice but to start SS right away.

Both Gradnma and Grandpa lived off SS for their only retirement income. No pensions, no savings, and profits from home sale when they downsized went to servicing outstanding medical bills.


As I understand both my grandparents were quite happy with the retirement, grandpa got kinda mad as the food quality declined as he moved to transitional care...but I think also his taste buds had declined, and his will might have a little as well.


Grandpa died at 92 never had anything but SS to live on from FRA to 92, grandma is still living on her SS in a subsidized 65+ apartment complex.



DF is a multi-millionaire...rags to riches? Or FOMO, or just sick of living in poverty, but he made a concerted effort to not be poor like Grandma and Grandpa.



Contrast to DW Grandparents who were able to pay for each of their grandkids private education from kindergarten through bachelors degrees.


I think some people say I married well, I say I got lucky!

 

[pb4uski]

Yes, as your post suggests it is possible to live on just SS if one has a modest lifestyle and LBYM mentality... my grandmother is an example (her low income also qualified her for below market senior housing)... but my point was that many people take SS early because they have no choice.

For example, if your grandfather had been laid off prior to FRA and was unable to find another job, then he would have likely started SS before his FRA. Similarly, if my friend is laid off or retires he will have no choice but to start drawing before his FRA.

 

[Fedup]

What do you mean by "Long term insurance"?

If you meant "Long Term Care Insurance" wouldn't someone have to die first for that to be viable?

Yes, LTCI

 

[NW-Bound]

Show her the longevity calculator above and perhaps it will help her understand.

It's not that she wants me to take my SS early. Rather, she said it was just as likely that I will survive her than the other way around. Survivor's guilt, as I said.

Well, I have only a suspicion that I will die first. It's more probable, but nothing is certain. So, I will not bring this up with her anymore.

 

[Fedup]

It's not that she wants me to take my SS early. Rather, she said it was just as likely that I will survive her than the other way around. Survivor's guilt, as I said.

Well, I have only a suspicion that I will die first. It's more probable, but nothing is certain. So, I will not bring this up with her anymore.

She maybe right, in the game of life, nobody knows. The sicker one might live long, and the healthy one might not.

 

[joeea]

Yes, LTCI

So tell me how your term life insurance could serve as Long Term Care Insurance? I don't see it.