Don’t Leave Social Security Money On The Table Like Other Retirees Do Every Day!
A lot of retirees are leaving money on the table for Uncle Sam. That’s because they are choosing to begin drawing Social Security at age 62. In fact, 45% of men and 50% of women begin drawing at age 62.(1)
This could be for a number of reasons. But I think one huge reason people draw at age 62 is because few people actually “see” the impact this decision will have on their monthly income. I see a lot of facts about Social Security published, but I see very little information published that actually illustrates the financial consequences of drawing benefits early or late.
For example, you’ve probably read it a thousand times: If you delay drawing Social Security you can maximize your benefit and have a bigger guaranteed check each month. This is certainly true, but it doesn’t tell you the whole story.
Here’s a couple of other popular bits of information that you have probably read about Social Security:
- If you draw at age 62 your benefits will be reduced by 25%
- If you wait till age 66 you’ll get 100% benefits
- If you wait until age 70 you’ll get 132% of benefits
All these facts are true (2). But what good are they if no one shows you how to apply the knowledge? What good are they if you can’t see the financial consequences of the different choices?
You may know you will have a 25% reduction in Social Security benefits if you draw at age 62. But do you know if it is better for you to draw at age 62 as opposed to waiting until you are 70? What’s the overall impact of that decision?
In this post I’m going to take you beyond just the facts. I’m going to show you how to apply these facts to help you make the best decision on when to begin drawing Social Security.
Specifically, I’m going to show you the results of a hypothetical scenario with a single person drawing Social Security at age 62 versus waiting until age 70.
This post will not explore the other Social Security claiming strategies that married couples can take advantage of. But married couples will still benefit from understanding the power of delaying your benefits that I discuss in this post.
When determining the time to draw Social Security benefits, there are other questions you need to answer, such as:
- If I begin drawing Social Security at 62, won’t I draw more money than someone who waits since I’m drawing for more years?
- If I delay drawing Social Security benefits beyond age 62, what income will I live on during my “delaying” years?
- Do I have the financial ability to delay drawing?
- How long would I have to live for it to make sense to delay drawing benefits?
- Do I have a family history of living long?
- Should I delay drawing Social Security until later to maximize the benefit, and in the meantime withdraw money from my savings/investments to give me enough income?
These are some of the questions that must be answered. There are a lot of factors to consider. And the best way to know how to answer these questions is by looking at a hypothetical example.
Really, the decision to draw immediately or to wait can be boiled down to a few simple questions that I include at the end. The decision can get more complex for a married couple, but you can apply some of these same questions to a couple’s situation as well. So let’s begin!
If I wait to draw Social Security, what do I live on in the meantime?
The first issue that needs to be addressed is “What will be my income during the years I delay my Social Security benefits?”
It is crucial to know the answer to this question. If you are determined to quit work at 62, then you will need to find another income source. But don’t start drawing Social Security just yet. It may be better to use your savings/investments for an income source and let your Social Security benefit grow.
Now if you don’t have sufficient assets to live on that will allow you to delay drawing Social Security beyond age 62, then you have two options. 1) Keep working, or 2) Begin drawing at 62.
But if you do have assets, it may make sense to draw down on those and delay your Social Security benefit. Essentially what you would be doing is spending some assets now to cover your current expenses in order to have a larger Social Security benefit for the rest of your life.
Check out this live Google Hangout video where I address these issues. The stuff in this video can get pretty “geeky” and seemingly complex. But I’m going to cut through all the complexity and get to the heart of the matter. In other words, when you are done watching this video you will know the important questions you need to ask yourself to determine if drawing Social Security early is the best choice.
The individual in this hypothetical scenario is a single man. He can begin drawing Social Security at age 62, and the monthly benefit would be $1,000. If he waits until he is 66 his monthly benefit would be $1,333. And if he waits until he is 70 his monthly Social Security benefit would be $1,760.
The range goes from $1,000 per month at age 62 all the way up to $1,760 per month if he waits to age 70. Waiting to age 70 can increase your benefit by 76%!
If the man decides to draw at 62 then he will get $1,000 a month. But if the man decides to wait until he is 70, he needs to have some kind of income for the 8 years that he is delaying his Social Security benefits.
So I checked some single premium immediate annuity (SPIA) rates for a 62 year old male that needs to receive $1,000 per month for 8 years. This would carry him from age 62 all the way to age 70 while he was delaying his Social Security benefit. Based on some of the current rates one estimate showed he would need to put $89,000 into a SPIA to generate $1,003 per month in income for 8 years. After 8 years the annuity would have completely paid out and the man would turn on his Social Security benefit at age 70.
So if he delays drawing Social Security until age 70 the immediate annuity will be there to provide income for the 8 years of delaying.
If the man decides to draw Social Security immediately at 62, then he obviously wouldn’t need to use the $89,000 for income in the first 8 years. What he could do instead is place the money in a fixed index annuity. I used some hypothetical figures for this that are close to what is currently offered on the market. This is just estimates showing approximation of what he could potentially get. This is in no way an actual quote. I assumed a 7% income roll-up rate, and after 8 years the income account value would have grown to $152,919. Keep in mind that is not the amount of money he could pull out of his account value in the annuity. It is just an accounting figure to determine how much guaranteed income for life he could have starting at age 70.
Using a 5.5% payout ratio, which is also reasonable for an insurance carrier to payout to a 70 year old, he could have monthly income of $701. The math works out like this:
$152,919 x 5.5% = $8,411
$8,411 / 12 = $701 monthly income
In this scenario, after 8 years has passed, the man will have the ability to turn on a lifetime income of $701 per month if he so chooses. So although his Social Security benefit is smaller due to drawing immediately at age 62, he will have this additional income at age 70.
Here’s a chart of what the man’s monthly income would look like under the two scenarios.
At age 70 both scenarios show a big increase in income. That’s because the “early drawer” turned on his income feature on the fixed indexed annuity at age 70 and added $701 to his income. The “late drawer” turned on his Social Security benefits at age 70 causing his monthly income to bump up.
At age 70 the delay strategy produces a higher income than the draw immediately at age 62. This is because Social Security under current rules allows built in growth for delaying. From age 66 to age 70 an 8% increase in benefits is added each year. And you don’t have to put any of your money at risk to get this growth. All you have to do is delay drawing your Social Security benefits.
To come out better by drawing early at 62 the man would have to grow the original $89,000 by a significant amount. But to get the necessary growth to make early drawing a winning strategy would require the man to expose this $89,000 to riskier strategies. At least that’s the case under the current interest rate environment. Riskier investment strategies would expose the man to potentially having a loss to his original investment of $89,000. If that happened, he’d be in much worse shape than the above chart shows.
So, should you draw Social Security at age 62?
There may be a lot of moving parts that go into an analysis like this. But there are a few simple questions you need to ask yourself to determine when the best time to draw Social Security benefits is.
Here’s a re-cap from the video of the important questions to ask yourself to make the best decision.
- Do I have resources to live on while I delay my Social Security benefit?
– If “Yes” you may consider using them while you delay drawing your Social Security benefit.
– If “No” you may have to either continue working or draw Social Security early.
- How long do I expect to live?
– If you have an illness that you think will prevent you from living beyond 73, then drawing Social Security early may make more sense for you.
- Is there longevity in my family, i.e. parents, siblings, etc?
– If “Yes” then you may live a long time too. The longer you live the more benefit you get from delaying drawing Social Security.
- Can I grow my savings enough to beat the growth that Social Security will give me?
– In my above example, when the individual drew Social Security early at age 62, he didn’t have to use the $89,000 in an immediate annuity. He was able to put it in a fixed index annuity that offered an income benefit rider that allowed him to get a contractually guaranteed additional $701 in monthly income (in this hypothetical example). This was not enough to beat the delaying till 70 strategy. Alternatively, he could have put his money in a potentially higher return investment. But typically with higher return comes higher risk. Is it worth taking the risk when you could simply play by Social Security’s current rules to get a better income level?
So, for a single person, these are some of the most important questions to ask when determining the timing of Social Security benefits. If you are married, the situation can get more complicated, and there will be more questions that need answering. Nevertheless, whether you are single or married, you can now actually “see” in the line chart above the power of delaying Social Security benefits.
Have Questions – Wonder What Would Work Best For You?
You are welcome to reach out if you have some questions. I know that some of the math behind the decision can be confusing, but I am here to help you navigate through it. You can leave a question in the comments section below. Just remember that comments are seen by anyone that visits this page, so make sure you don’t reveal anything about yourself that you want to keep private. You can also email me privately. I try to get to all questions as quickly as possible.
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