Instead of asking you to simply rely on “conventional wisdom” which generally supports deferral until age 70, this post will actually look at some of the math involved (using results from the Actuarial Budget Calculator (ABC) for Single Retirees), and it will also address some of the other factors that you might consider if you are trying to decide whether to commence your Social Security benefits now or later.
Note that Social Security benefits are subject to earnings limitations if you have not reached your Social Security Normal Retirement Age. This post examines the decision of whether or not to defer commencement for individuals who are no longer employed or whose employment earnings are less than the applicable earnings limitations. And while we will try to show below that it is generally financially better in the current economic environment to defer commencement of Social Security benefits if you are not employed, it is almost always much better financially to continue to work and defer commencement of your Social Security benefits.
In addition to crunching your own numbers, you may wish to consider several other factors when making your decision regarding when to start your Social Security benefit. These factors include:
- Your financial situation, marital status and spending goals
- Your best estimate of future economic experience
- Your best estimate of your (and/or your spouse’s) health and longevity
- Whether you believe your Floor Portfolio needs more funding
- Your comfort level with spending a significant portion of your Accumulated Savings during the bridge period – the period between when you stop working and begin receiving your Social Security benefit
- Your assessment of the likelihood that your Social Security benefit may be reduced in the future as part of Social Security system reform
Hypothetical retiree
For this post, we will use Bill as an example. Bill is age 62, single and may have recently lost his full-time job. He has $500,000 in Accumulated Savings and is currently eligible to receive an immediate early Social Security benefit of $18,000 per year. He has no pension and no other retirement assets.
Bill’s financial situation
His first step to determining his financial situation is to run the ABC for Single Retirees to develop a maximum spending budget assuming he is forced to retire now and will not find employment in the future on either a full-time or part-time basis. Under “commence now” scenario, he will assume he commences his Social Security benefit immediately. He inputs his age and sex, and uses the default assumptions. He also inputs the following items:
| Accumulated Savings: | $500,000 |
| Social Security benefit: | $18,000 payable annually, commencing immediately |
| Present Value of unexpected non-recurring expenses: | $25,000 |
| Extra medical cost: | $5,000 payable annual for 3 years until he becomes eligible for Medicare at age 65 |
| Desired estate at end of LPP in today’s dollars: | $20,000 |
His Input & Results tab looks like this:
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| (click to enlarge) |
Bill’s screen shot shows that under these assumptions and input items, his maximum annual recurring spending budget is $36,700 and his total maximum spending budget, including his estimated extra medical cost is $41,700.
He then goes to the Asset Reserves by Expense Type Tab to see if the Present Value of his retirement assets is sufficient to cover the Present Value of his estimated expenses (reflecting his goals in retirement) as well as the Present Value of his future essential expenses. He determines that while he doesn’t have a lot of wiggle room, his current retirement assets appear to be sufficient to fund his future estimated essential and discretionary expenses and the Present Value of his essential expenses is about $806,000, or about 86% of the Present Value of his assets. The Present Value of his discretionary expenses is about $126,000, or about 14% of the Present Value of his assets. Thus, if he wants his Floor Portfolio to cover the Present Value of his essential expenses, he will need to allocate about $374,000 of his Accumulated Savings to non-risky investments, in addition to the Present Value of his Social Security benefit under the default assumptions of $432,610 for an initial Floor Portfolio of about $806,000. This would leave Bill with an Upside Portfolio to be invested in riskier assets of about $126,000.
Being age 62 in 2020, Bill’s year of birth is 1958, so his Social Security Normal Retirement Age is 66 and 8 months. Under the “defer to 70” scenario, he estimates his age 70 benefit to be $35,836. He estimates this amount by:
- dividing his early retirement Social Security benefit of $18,000 by his early retirement factor of .7167
- increasing the result by a deferred increase factor of 1.2667 (for the 28 months between his Social Security Normal Retirement Age of 68 and 8 months and age 70), and
- increasing the result for 8 years of cost of living adjustment increases estimated at 1.5% per annum.
Thus, under the default assumptions used in the ABC workbook, it appears that Bill would be wise to defer commencement of his Social Security benefit until age 70. But, these assumptions are default assumptions for budgeting purposes and may not accurately predict the future. What happens if future experience is different from these default assumptions?
What is your best estimate for future economic experience and your lifetime planning period?
The table below shows the Present Value of Bill’s immediate $18,000 Social Security benefit and an estimated age 70 benefit of $35,826 under different sets of investment return, Inflation and lifetime planning periods. It should be noted that:
- 26 years is the life expectancy (50% probability of survival) for a 62-year old non-smoker male in excellent health from the Actuaries Longevity Illustrator (ALI),
- 32 years is the 25% probability of survival for a 62-year old non-smoker male in excellent health,
- 18 years in the 75% probability of survival for a 62-year old non-smoker male in excellent health
- 23 years is the life expectancy for a 62-year old non-smoker male in average health, and
- 20 years is the life expectancy for a 62-year old non-smoker male in poor health
- Investment return percentages shown are nominal rates
Annual investment return / Inflation / LPP
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Present Value of immediate $18,000 Soc. Sec. benefit payable at age 62
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Present Value of deferred $35,836 Soc. Sec. benefit payable at age 70
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Ratio of Present Values (3)/(2)
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1.5% / 1.5% / 32yrs
| $576,000 | $763,488 | 1.33 |
| 2.5% / 1.5% / 32yrs | 496,826 | 632,084 | 1.27 |
| 3.5% / 1.5% / 32yrs | 432,610 | 526,633 | 1.22 |
| 4.5% / 1.5% / 32yrs | 380,135 | 441,484 | 1.16 |
| 1.5% / 1.5% / 26yrs | $468,000 | $572,616 | 1.22 |
| 2.5% / 1.5% / 26yrs | 415,142 | 487,721 | 1.17 |
| 3.5% / 1.5% / 26yrs | 370,645 | 417,120 | 1.13 |
| 4.5% / 1.5% / 26yrs | 332,991 | 358,164 | 1.08 |
| 1.5% / 1.5% / 18yrs | $324,000 | $318,120 | .98 |
| 2.5% / 1.5% / 18yrs | 298,490 | 281,540 | .94 |
| 3.5% / 1.5% / 18yrs | 275,890 | 249,657 | .90 |
| 4.5% / 1.5% / 18yrs | 255,838 | 221,810 | .87 |
The table generally confirms the conventional wisdom that unless you are in poor health or otherwise know that you will die earlier than most, it still makes financial sense to postpone Social Security benefit commencement. Possible exceptions to this conventional wisdom may apply if you are not going to (or can’t) establish a Floor Portfolio and need to invest in risky assets to maintain your lifestyle in retirement or you know that your health is impaired. The table also shows that the lower the expected real rate of return, the larger the benefit of deferring commencement of Social Security, all things being equal.
If you are currently older than age 62, the differences in Present Values attributable to deferral to age 70 will be less than amounts shown in the above table.
It is difficult to predict how long you or your spouse will live. Unless you are aware of clear health issues or other health factors that would limit your life expectancy, (or you believe that we will experience more of these pandemics in the future), it is generally prudent for budget planning purposes to assume longer lifespans. It can be argued that the same level of conservatism is justified for assets included in a Floor Portfolio.
Comfort level in spending more during bridge period
If you defer commencement of your Social Security benefit until age 70 and want to meet your spending goals (including having approximately constant year to year spending) during the “bridge period” from age 62 to age 70, you are going to have to withdraw more from your Accumulated Savings during this period. If Bill spends the maximum spending budget each year from 62 to 70 and all assumptions made in ABC are realized, the Inflation-Adjusted Runout tab shows that Bill’s assets under the deferral scenario are expected to be $212,038 when he reaches age 70 as compared with expected assets under immediate commencement scenario of $403,615, a difference of $191,577.
Conceptually, deferring commencement of Social Security to age 70 is similar to purchasing a deferred life annuity from an insurance company with annual premiums until age 70. The premiums are equal to the increased withdrawals during the bridge period that are used to pay your expenses. However, in today’s economic environment, deferring Social Security commencement is a better financial bargain than purchasing a fixed dollar annuity.
As a practical matter, this increased spending requirement during the bridge period may make the deferral strategy impractical for those who haven’t accumulated enough savings to make this work. And others may be uncomfortable losing the spending flexibility that comes with having a larger pot of Accumulated Savings rather than a larger Social Security benefit and smaller Accumulated Savings.
Death benefits for married couples
Taking Social Security benefits early can reduce survivor benefits. The impact of taking benefits early will depend on:
- Your early retirement benefit,
- the age of the surviving spouse when you die and
- the benefit earned by the surviving spouse based on his or her own record.
Possible future reduction in Social Security benefits
There is nothing that guarantees that Social Security benefits (even those in pay status) won’t be reduced by a future act of Congress. The system has financial problems and Congress will look into possible benefit reductions and/or tax increases to bring the system back into financial balance. We believe it is unlikely that benefit reductions, if enacted, will involve across the board decreases in benefits (other than perhaps reduced cost of living increases). Means testing of Social Security benefits has been proposed in the past, so it is not out of the question that future reform could involve significant reductions for more wealthy individuals or couples.
Spend more earlier if you take Social Security early?
In her article, Michele Singletary indicates that her husband thinks it is better to take Social Security early, “because we could use the money to travel more while we are healthier.” And while traveling earlier in retirement is a perfectly reasonable spending goal, deferring commencement of one’s Social Security benefit is not necessarily inconsistent with this goal. It would, however, require increased withdrawals from accumulated savings during the deferral bridge period.
Already have too much in your Floor Portfolio?
There may be some fortunate people with significant pension benefits or other annuity income who believe they already have enough or too much money in their Floor Portfolios and would like to increase investments in their Upside Portfolios. These individuals may believe that they can earn more by investing in the stock market than they can by essentially investing in the Social Security deferral approach.
Summary
This post shows that for most single people in reasonably good health who can afford to spend a fair portion of their Accumulated Savings during the deferral bridge period, deferring Social Security is even more financially advantageous under the current low-interest economic environment than it was before. It is frequently an even better option for married couples because of the potential for increased survivor benefits. Absent significant changes in Social Security law, significant changes in population mortality rates, or a need or desire to invest more of your assets in more risky investments, we believe deferring Social Security commencement will generally be the better financial decision.
