Show Me the Money

By now I’m sure you’ve heard how important it is to try and wait on starting your Social Security benefits. You’re leaving money on the table if you don’t, etc, etc. While the reasons for this make good intuitive sense, lots of people seem to be going in the other direction.

I mention this because of a survey from Schroders, a global investment firm. Survey respondents report planning to start their benefits before their full retirement age, even as they report recognizing how this will cost them money in the long-term.

The survey was covered in USA Today recently, but I’ll share sections of the article here so we can discuss some of the issues. My notes are italicized for clarity and a link to the full story is below…

Only 10% of nonretired Americans say they will wait until 70 to receive their maximum Social Security benefit payments, according to the 2023 Schroders U.S. Retirement Survey of 2,000 U.S. investors nationwide ages 27-79 between Feb. 13 to March 3.

Overall, 40% of nonretired respondents plan to take their Social Security benefits between ages 62-65, leaving them short of qualifying for their full retirement benefits. 

How much is full Social Security now?

Social Security Income (SSI) benefits are based, in part, on a Full Retirement Age (FRA) that depends on your birth year. For example, those born in 1954 or earlier have an FRA of 66 and this tapers up by month to those born in 1960 or later who have an FRA of 67. Your FRA is like a line in the sand, or perhaps a pivot point. You can start taking your benefits at 62, but it gets reduced a bit for each month that you take it early, at about an 8% annual rate. Conversely, your benefit base grows by the same amount every month you wait beyond your FRA and keeps growing until age 70, assuming you can hold off for that long.

For example, if you retire in 2023 at full retirement age, your maximum benefit would be $3,627… However, if you retire at age 62, your maximum benefit would be $2,572. At age 70, your maximum benefit would be $4,555. 

That you get more for waiting seems straightforward, but the real impact shows up in cumulative household cash flow over time. If we assume longevity will be on our side the total additional money after waiting until 70 to start SSI would be sizeable. For example, a random sample from the variety of financial plans I’ve done over the past 10+ years shows about $100,000 of extra income over a longer life expectancy by waiting until age 70. Contrast this with starting SSI early, and household income is reduced by roughly $174,000, on average, over a retirement period. The breakeven age is often in the late-70’s, so you’re coming out ahead automatically if you think you’ll be receiving payments for at least that long.

“The choice to forgo larger Social Security payments is a deliberate one, as 72% of non-retired investors – and 95% of non-retired ages 60-65 – are aware that waiting longer earns higher payments,” Schroders said in a statement. 

Why are Americans choosing to take Social Security earlier? 

Mostly fear.  

Forty-four percent said they were concerned that Social Security may run out of money and stop making payments, and 36% expect they’ll need the money, the survey said. 

Social Security is expected to be depleted in 2033, a year earlier than prior forecasts, the Congressional Budget Office said in June. 

“We have a crisis of confidence in the Social Security system and it’s costing American workers real money,” said a rep from Schroders.

Fear can be helpful when it makes us skeptical and forces us to ask questions. But fear gets irrational pretty quick and can lead us to make poor choices. That said, it’s understandable that many, if not most, Americans are afraid that their SSI won’t be there when they need it. The issue is discussed frequently in the press and asking Google will only lead you down the rabbit hole.

The latest news is that SSI benefits will have to be cut by 23% starting in 2033 because that’s when the program is projected to become insolvent. If so, this would mean a reduction in cash flow for a typical household of about $14,000 per year, according to the Committee for a Responsible Federal Budget. That sounds huge, and it is, but how likely is that to actually happen?

Frankly, I don’t know which is more cynical, that our elected officials are so inept (or collectively uncaring) as to let this happen to Social Security, or that they’ll probably wait until the last possible moment to kick the can down the road again. Either way, “fixing Social Security” has long been known as the third rail of American politics for good reason: nobody wants to touch it.

Personally, I’m in the “kick the can down the road” camp. My reasoning has to do with how our elected officials know how to fix the problem because the recipe is reported to them annually by the folks who run the program. Taxes will need to be raised on higher earners, the FRA will need to go up to 70 or 72 for younger workers, and yes, benefits could be trimmed but other tweaks could be made prior to that. Take any one or all three and you can see why “delay and catch-up” seems like the most workable solution from a political perspective. Nobody wants to stick their neck out far enough before there’s a real crisis to solve.

Okay, so where does that leave us? I think a pragmatic approach is best. What I mean is that instead of potentially hamstringing yourself by starting benefits too soon, try to wait as long as possible. You can start your benefits in any month once you’re 62, so just hold off as long as you can. Ideally you’d at least wait until your FRA to get your “full” benefit, but every month you wait means a high benefit base than it would otherwise be, and that lasts the rest of your life.

But how are you supposed to get by without your SSI? Spend from cash savings. Spend from your bond investments, maybe your stock investments too. That’s what you’ve been saving for, right? Work with me (or another fee-only planner) to strategize about how best to do this. You might have more room to wait than you realize.

https://www.usatoday.com/story/money/personalfinance/2023/08/08/social-security-fears-spur-early-retirement-plans/70551333007/

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