Apr 28, 2016

Maybe Waiting To Start Drawing Retirement Benefits Isn't Such A Good Idea

     Most commentators advise waiting until age 70 to start drawing Social Security retirement benefits because if you wait, you draw more. Everyone already knows that if you wait until full retirement age, currently 66, you draw 25% more than if you start retirement benefits at age 62, but if you delay starting on benefits until age 70 you receive even more benefits. There's no point waiting until after age 70 because benefits don't go up after that. 
    Here's a chart showing the "breakeven analysis" used to display the argument that it's best to wait until age 70 if you can:

     The Motley Fool argues that the advice to wait until age 70 is bunk. They say that the standard breakeven analysis is flawed because it doesn't factor in the time value of money, that is, interest. If you start drawing $1,000 a month at age 66 and put it in the bank until age 70, you don't just end up with $1,000 times 48 months, $48,000, you end up with a larger amount due to the interest you will have earned. Here's the Motley Fool's breakeven analysis, assuming a 5% interest rate:

     A 5% interest rate may be a bit more than you're likely to get under current conditions but you get the idea. Delaying starting benefits may not be all it's cracked up to be. Maybe Social Security isn't giving a big enough delayed retirement credit to make it worth foregoing the income now.

17 comments:

Anonymous said...

I plan to wait until 70 to take Social Security, not just because the expected total benefits (using my assumptions) is higher, but because I want the largest inflation-adjusted, guaranteed-for-life check. I assumed that I will live to my current life expectancy and that my savings will earn the rate of inflation, which is conservative (and gives maximum benefits if they are started 16 months before age 70). A 5% return is too high (and I think this is 5% above inflation, because they don't seem to be adjusting Social Security benefits for inflation), since I assume a retiree will want to invest conservatively.

Anonymous said...

This does not factor in spousal or DAC benefits at all.

Some people are disciplined enough to save but many are not, so it could be good for the less-disciplined folks to have SSA "hold" the money.

Also, I don't think it's been possible to get 5% in even a 5-year CD since about 2001. So assuming that you're going to average that rate of return over the decades of retirement seems overly optimistic. You could try riskier investments--but they have risk, management fees, and tax implications.

The only way to know for sure what's the best time to take retirement benefits is to know exactly how long you'll live. And good luck with that.

Anonymous said...

If one is working and earning good money until age 70, why would one begin taking benefits prior to that?? Doesn't make sense.

Anonymous said...

This is a shell argument. If you need to take benefits at age 62, then you will not be in a position to save said benefits. While the time value of money is a real thing...in practical application, it won't matter to those who start collecting at age 62 and need the money to pay current expenses.

Anonymous said...

Exactly, it is an individual decision based upon individual needs at the time.

Anonymous said...

Motley Fool is a website for people with plenty of money. Obviously, you cannot wait until age 70 to collect benefits unless you have enough money to last until then (either from savings or from continued working, although in the latter case there's a reduction in benefits until normal retirement age unless earned income is small). So the exercise is for people who can afford to wait. I think this is also why they use 5%, which they say is modest - people who read Motley Fool have lots of money and so can afford to put money into riskier investments.

Anonymous said...

That's what the government wants...work yourself closer to death before they have to pay out. You get more per month, if you make it, but they pay less overall because most people don't live to 90.

Anonymous said...

I don't think that's what "the government" wants. Most people take benefits at 62, which the government has not changed even when they raised the normal retirement age. Also, I might be willing to start collecting after age 70. However, they do not provide any additional benefits for delaying past 70, effectively forcing you to take benefits by then (unless you want to just forfeit the checks between 70 and whenever you start). If they want you to wait, why not let you wait past 70, or raise the earliest age to receive benefits?

Anonymous said...

It really is an easy formula. If you need it to meet your expenses you take it early. If you do not and are in good health and think you will be living for a good while then take it at 70.

Anonymous said...



According to a 2015 Transamerica survey, among retirees who were asked to self-identify as either fully retired or semi-retired, "91% of retirees say they are fully retired and they retired at age 62 (median). 61% retired before the age of 65. As for the other 9% of retirees who self-identify as semi-retired, they expect to stop working altogether and fully retire at age 70 (median)." (p. 8)

Source:

Collinson, C. (2015). The current state of retirement: Pre - retiree expectations and retiree realities. US: Transamerica Cener for Retirement Studies. Retrieved from http://www.transamericacenter.org/docs/default-source/retirees-survey/retirees_survey_2015_report.pdf

Anonymous said...

First off, to start the analysis with an assumption of 5% return on invested funds is ridiculous. That rate can be achieved by investing in a junk bond fund but with Treasuries for up to 3 years under 1% and even 30 years at 2.68%, the initial starting point of the analysis fails.

At the same time, an analysis that looks only at the break even point, misses the point. Certainly, if you live long enough there will be a point where it was better economically to wait whatever the assumed interest rate would be. And if you die earlier, then waiting would be the wrong choice. Except, if you die earlier, you won't be around to know the difference. You're dead. (Yes your heirs might care but only if you didn't spend whatever money you received in the first place)

The real answer, that I tell my clients at least, is the better deal long term is to wait but only if you can afford to wait. If you need the money to survive now, then waiting makes no sense at all, but the same must be considered in terms of being able to live the life you want to live now.

Anonymous said...

It is a moot point because of all the TV, radio, and online advertising by lawyers and disability mills urging people who have retired at 62 to apply for disability and get the "bump up" to full benefits. And they wonder why there is a backlog at ODAR.

Anonymous said...

"It is a moot point because of all the TV, radio, and online advertising by lawyers and disability mills urging people who have retired at 62 to apply for disability and get the "bump up" to full benefits. And they wonder why there is a backlog at ODAR."

What drives me crazy are comments by what I assume are SSA Employees who think they understand the Disability program but make comments that make no sense. Specifically, the ODAR backlog is now roughly 1.1 million cases. The number of those cases where the person is over 62 years old is vanishingly small.

If attorneys are soliciting for those claims, they are soliciting for the least profitable of all claims. Remember, the 25% fee is only on the difference between the benefits paid anyway and the bump up based on disability. For someone who has a PIA of $2,000.00, an exceptionally large amount, the difference is only about $400/month if they start at 62. The fee on that case would be 25% of that $400.00 ($100.00/month) for however many months it takes for that claim to be approved, less the five month waiting period. If these cases are as simple for a person of that age, and they may well be, the time it takes to resolve the case on initial or recon will be less than a year. So the fee in such cases would be in the hundreds of dollars at best. Sure, those are the cases it pays to put money into advertising to obtain.

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Anonymous said...

9:53 is right on! Because of the long backlog, my disability clients who reach 62 are usually financially desperate--they take retirement at age 62 and regard it as a blessing that may help them hang onto their home, if it is not already in foreclosure. With ALJs ramming "amended onset dates" down claimants' throats to get a favorable decision, there may be only a few months' benefits after the 5 month waiting period. These cases are worth very little to an attorney; I usually will not break even on these "bump up" cases unless an ALJ allows a reasonable onset date from early in the claim's duration.

Anonymous said...

I started at 66 and am still working. An extra 24,000 a year taxed at 25% leaves $18,000 extra income after taxes. It's going into a fund to buy a small home rental which will return 7-10% per year on a $36,000 down payment. The rest of it goes into a Roth IRA which returns 5% on a basket of 6 REIT and Utility stocks. Its all found money put to work to grow into an income stream for when I really retire.

Anonymous said...

Another point to consider, if you start at 66 and later die, your spouse, if you have one, will receive that amount if he/she if full retirement age. If you take the 32% extra by waiting to 72, you may draw 4 years less and may not make it to the breakeven point but your surviving spouse may.
When I am asked when someone should take Social Security, I ask them how long they are going to live and their spouse is going to live, if they have one.