Wednesday, May 18, 2016

Social Security: To wait or not to wait....

There is a common myth that the longer I wait to claim my Social Security retirement benefits, the more money I will make. This is true, but not to the degree that people think it is. It depends upon my situation: if I have savings or income, then, yes, I am better off waiting to draw Social Security—a simple decision. If I don't need it, I won't draw it until either my income drops or I reach the age of 70, at which time I'm fully vested and there is nothing more to gain from waiting.

But there is a large class of people who have little more than their Social Security, which is a scary situation because it isn't enough to live on in the United States. But let's say I manage a handful of part-time jobs; or I sell some goods or skill I have; or I go overseas and teach for awhile, letting my checks accumulate in my checking account (which might be programmed to transfer the money automatically to my broker's index fund); and the income plus the monthly government checks make life manageable. In these cases, I might decide to start drawing on my Social Security.

Everyone's benefits will be different, and you can find out what yours will be by registering at the Social Security Web site. It's a good idea to register and get to know that site as early as you can because it has a wealth of information that can help you plan your retirement even if you are now only twenty or forty years old. On the site I can find out my estimated benefit depending upon the age at which I retire (this will increase as long as I continue to pay Social Security tax). I can also see my taxed Social Security earnings and my taxed Medicare earnings off which my benefits will be based. Keep in mind that those two earnings will be less than my actual gross income, but I need to keep an eye on them to be sure they're accurate. When the time comes to draw my retirement, it's a simple five-minute operation on the site. That Web site makes easy many operations for which I used to have to go to the local Social Security Administration office and wait in multiple, long and slow-moving lines.

I did some simple math, which I present in this little spreadsheet. This is only an example that presents a hypothetical person's income so I can see what happens if that person starts drawing income at different times. My hypothetical person throughout this short blog is male, largely because I have adapted some of my own numbers to color the proposed case. I apologize for not having the time to work up a separate hypothetical case history for women.

AGEStart at 62Start at 66
 + 2 mos
Start at 70
Monthly Benefit$1,049.00$1,407.00$1,839.00
Benefits to Date at 70 years old70$100,704.00$64,722.00$0.00
Benefits to Date at 80 years old80$226,584.00$233,562.00$220,680.00
Benefits to Date at 90 years old90$352,464.00$402,402.00$441,360.00

The second row of the table shows that the hypothetical person's benefits will be $1,049 monthly if he starts drawing Social Security at age 62; $1,407, at age 66 plus two months; and $1,839 at age 70. The next row shows how much money he will have received at age 70 depending upon when he started receiving benefits. At age 70, he will have received the most money if he started at have 62. The retiree who started at 66 plus two months hasn't had time to catch up yet, and the retiree who started at age 70 is only beginning. At age 80, though, the 66-year starter has just caught up with the 62-year starter, though the 70-year starter is still slightly behind.

Social Security uses actuarial science, the same sort of number crunching used by life insurance companies, to estimate how many people they will be paying from each age group. This means I have to consider some hard facts when I make decisions about when to draw my Social Security benefits. When I am born, their actuarial table says I have a life expectancy of 76.18 years, so by reaching 80, I have already outlived their predictions. And if I reach the age of 80, their table says I have a life expectancy of 8.13 more years, and if I make it all the way to 90, then at that point I will have $50K to $100K less than the later starters. A graph of the different income rates looks like this, where the blue line shows cumulative income for the 62-year-old starter; the red line for the 66-year-old; and the orange line for the 70-year-old:
There are other factors that I haven't considered. One factor is the question of present value vs. future value. Money always now costs less than it will in the future. That, for example, is why there is interest, and that is why prices associated with stock options act so strangely. 

Another factor is inflation. Although the Social Security Administration supposedly adjusts their benefits to compensate for inflation, the cost-of-living adjustment for 2016 was 0%.

The Social Security Administration's computations of life expectancy are based on observations of the entire population of the United States. With over 300 million people in the mix, the average age of death appears to be well defined. An individual like me can hope to "cheat" death by outliving my peers, but not everyone can: that would be like Garrison Keilor's Lake Woebegone, where all the children are above average. 

In this chart I have computed how much money the average person will draw if he lives the expected lifespan for the age at which he starts drawing. This narrows the total benefits range to about $60K between the 62-year-old starter and the 70-year-old starter.

Expected Lifespan
Life expectancy (male) at 62 (19.90)—$1049/month81.90$249,662.00$264,516.00$261,138.00
Life expectancy (male) at 66 (16.93)—$1407/month83.09$265,397.00$285,621.00$288,723.00
Life expectancy (male) at 70 (14.13)—$1839/month84.13$277,985.00$302,505.00$310,791.00

So do I bet against the Social Security actuarial tables for a shot at an extra $60K? At a point when mere existence seems increasingly hypothetical, I'm inclined to take the bird in the hand rather than wait for the two in the bush that I might not live to see. I admit I could be wrong. There could be a clearer, less intuitive logic that you can use to reach a conclusion here, which is why you should read my disclaimer before you make any rash decisions.

DISCLAIMER: I am not an estate planner, attorney, or accountant, and this blog at most should be treated as entertainment that provokes some thinking toward planning your future, which never hurt anyone. At most, you should treat these random musings as a starting point for questions with a qualified professional. Caveat emptor, and all that jazz.

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