The Social Security Trap: When Waiting Until 70 Becomes a Huge Mistake
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- Опубліковано 7 тра 2024
- Are you considering delaying your Social Security benefits until age 70 based on the belief that the break-even age is around 80 or 81? This might not be the best decision for you. In this video, James delves into a real client example to illustrate how decisions around Social Security can have profound implications on your financial plan.
Greg and Sherry, a couple aged 62, approached us with the goal of retiring immediately. They had a substantial portfolio, including 401(k)s, Roth IRAs, savings, and a paid-off home. Their aim was to maintain a $6,000 monthly lifestyle throughout retirement, accounting for healthcare expenses and taxes.
Key Assumptions:
Aggressive Investment Mix: 90% in diversified stocks, 10% in various bonds, projecting an 8.8% annual return.
Longevity: Projected lifespan until age 95.
The traditional analysis suggests that delaying Social Security until age 70 yields greater lifetime benefits. However, a detailed examination reveals a critical factor often overlooked - the impact of delayed Social Security on the overall financial plan.
Initial Analysis: If Greg and Sherry chose to collect Social Security at 62, their portfolio would maintain a healthy trajectory, allowing them to meet their expenses over the years. The net effect was positive.
Counterintuitive Results: When they considered delaying Social Security until age 70, the seemingly increased benefits came at a cost. The strain on their portfolio during the years without Social Security income significantly offset the potential gains, resulting in over $400,000 less at the end of their lifetime.
James emphasizes the often-underappreciated role of the rate of return on investments. In a hypothetical scenario with a lower growth rate of 6.3%, delaying Social Security until age 70 proved to be more financially advantageous, adding over $850,000 to their overall wealth.
While the break-even age is commonly cited as a justification for delaying Social Security, the analysis reveals a more nuanced reality. Even with the additional wealth created by delaying, the break-even age could still be around 86.
The decision on when to collect Social Security is complex and interconnected with various aspects of your financial plan. A holistic approach, considering factors like investment growth, tax implications, and other income sources, is crucial. There is no one-size-fits-all solution, and a personalized analysis based on individual circumstances is imperative.
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⏱Timestamps:⏱
0:00 Delaying social security?
0:30 A case study
3:30 Things to consider
6:00 Calculating portfolio withdrawal percentage
8:09 SS at 62 versus 67
11:55 The analysis
13:50 Opportunity cost
14:28 No one size fits all
16:48 The impact of growth rate
18:16 The break-even age
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Doesn't matter for me - whatever choice I make will be the wrong one. This conclusion is from many years of research that I have painstakingly participated in. Whenever I go to check out at the grocery store I always pick the wrong line.
Here is your chance to get it right, for once.
My parents retired at 62. The activities and travel they did between 62-70 couldn't be replicated over the age 70. They slowed down a lot. My Father worked in a factory and stood on his feet all day. He did get a small pension as well as social security. They had no debt, car and house paid for.
Exactly. Retire and do the things you want to do before age catches up with you. It’s not all about money.
That depends upon their health, of course. By exercising and eating healthy foods on a regular basis, you can easily enjoy a full retirement into your mid to late 70s and even early 80s. For this scenario, collecting SS starting at age 65 makes much more sense. In addition, Medicare eligibility starts at this age. Before then, your medical insurance could be much more expensive.
Being debt free is key to being able to enjoy your retirement.
Retire at 62, but wait until 70 to collect SS
To borrow an adage: You always know how much money you have, it you don’t know how much time you have. If you keep up on current events I often read about about notable folks are passing away mid 70’s. Hedge your bets.
l retired at 62 and am now 82. No regrets. The last 20 years have been fantastic. So many of my fellow factory workers never made it to 65 and many that did died soon afterwards. How much is a year of one's life worth? Prepare for retirement in your earlier years and stay out of debt as much as possible. That's what I did and I'll probably die with more than I'll need.
Nice work! yeah, we don't need much when we're gone. ;)
I agree with your staying out of debt statement.
You're ABSOLUTELY right!!!!!!!!
My husband is an early retired electrician. No regrets either. It's been a wonderful 5 years. We also paid off our house early. We eat well, both of us being home "chefs". We have had many beautiful dogs through the years and we have loved it. We have never been on a vacation though. I guess you can't have it all. We also do not have children by choice.
If you also have investments, when you take social security and when you retire are separate decisions.
I waited until 70 to collect my SS and have absolutely no regrets. I loved my job as a college professor, am in excellent health, and have other income. Here is the thing no one seems to mention. If I pass before my wife, she gets my SS. In our case, mine is significantly higher than hers. By waiting until 70, if she collects mine, she will get the maximum possible out of the system.
I did the same thing for the same reason and am glad i waited
Every case is different. My assets were similar to the couple here at age 62 and I initially went with taking SS benefits at 62 until both my accountant and financial planner talked me into returning the SS and waiting until 70. I'm now 74 and it has worked out great. The gain in benefits by delaying is substantial. Good luck to everyone.
Waiting until 70 to file will give you a substantial bump in benefits as long as you continue to live, but according actuarial data the average life expectancy in the US is the mid 70's. Those that live into their 90's are only around 4% of the population. Therefore I'm filing at full retirement age, this will allow my retirement portfolio to continue to grow (hopefully) while I draw on social security benefits. Also, I can pass along any residual retirement assets as part of my estate. Waiting to file for social security at 70 gives you more each month but it stops at death. I'd rather take my own money that's been paid to the government for decades and spend it while I let the portfolio continue to grow 👊🏻 Receiving monthly social security payments will most definitely take the strain off portfolio withdrawals. I do think that the financial industry and the government wants you to spend your savings down hoping you'll die before or soon after you file for social security. The fact that most die in their 70's and advise from most advisors suggest you should wait until your 70 to file speaks volumes to me.
It is easy to see that a 8.8% return per year on social security that is invested beats an approximate 7% loss in benefit per year by waiting. Now show me where I can get a guaranteed 8.8% return for the duration of the social security deferral period and I’ll start collecting tomorrow. Another consideration in waiting to collect is the ability to convert more IRA balances to Roth at a lower tax rate before social security kicks in.
You hit the nail on the head, TWICE!
Agreed!
They should definitely consider converting some 401k to Roth in the first year they are not working and before they collect SS.
The last sentence was a critical factor for me. By properly managing my income I was able to obtain significant health care subsidy for my younger wife until I had to take SS at 70.
Assuming a 7% return is a huge assumption for somone making a bet on an irreversible decision.
Meanwhlile, longevity risk.
This video sounds kinda Dave Ramseyish to me.
Yes. We are delaying and will do large Roth conversions up until age 70.
He didn't say the return is guaranteed. Average return.
I think the problem with this scenario is the assumed 8% return. Since they will be withdrawing some, you have to at least account for Sequence Risk.
Another strategy that hedges a little more is having one spouse take early and one late especially if they both have reasonable benefits.
My wife took at 63, I’m waiting till 70. That way we decrease portfolio withdrawals and maximize one survivor benefit at $4500.
Both taking early with longevity creates a “must have portfolio” in old age, whereas an inflation adjusted $4500 will cover almost all basic needs when very old.
I agree that a "cleaner" way or another way would be to use the 10-year yield of 4.8% on the deposits without risk, but I'm just a college dropout.
You’re right
Forecasting an 8.8% return over 30 years is a financial planners sales tactic. It ignores the macroeconomic fact that as boomers start to retire equities are not going to continue to rise at that rate because more retirees are going to be withdrawing dollars from their 401k’s than working folks are depositing.
What if she took at 70 vs you taking at 62 bc females are expected to live longer?
63
Just consider one thing: As a male, you are the shorter lived person. Yet, you are working longer so your wife can retire earlier. In other words, you are sacrificing years of retirement so she can have a longer retirement. Not to be a troll, but is this really what you want?
You have only so much priceless time, and you can't know what tomorrow will bring. Things to keep in mind.
thats why I got out at 63 I seen to many people work way into there 60s retire and die in 6 months or less
It’s hard to say. I knew people that retired early at 55, and passed a year later. I also know people who worked till 71 that are still going strong in retirement. Too many variables
@@Energyequalsmc2 By the time we are 50 we can see the writing on the wall clearly enough. I loved my job but I knew the go! go! go! was bad for my body.
Yep, but also to keep in mind that stopping work and taking social security don't have to be the same date.
I can tell you my goal is not to die with as much money as possible. It is much more important for me to ensure that I never get to zero. Your second "SSA AT 70" scenerio shows a big surplus at age 95, but also shows a lower low point than the "SSA AT 62" scenerio while in their late 60's. That's what I focused on.
I would rather have 7 millon at 62 not 92.....................................
Good point for many: _Factor in the Pucker Factor_
Same here. I don't care about wrenching as much as possible from Social Security, rather to get the lowest risk possible.
I don't think I'll have an opportunity to spend that extra money post-mortem.
If you retire at 62 and take SS, you are stuck with it. If you retire at 62 and your current plan includes taking SS at 70, you still have the choice to take it sooner, if your plan changes and it makes sense. I like to maintain my options and my current plan works best at 70.
If you file early, you can later suspend SS anytime between FRA and 70. Then reinstate any time before 70. I know someone who,did this. And will earn credits while suspended.
Great point. I plan to retire at 62 and plan to look at a "62 vs 63" scenerio first. If I decide on the 63 scenerio then before I turn 63 I will look at a "63 vs 64" scenerio. If at that point I decide on the 64 scenerio then I repeat the process. SSA at 70 is not a commitment you have to make at age 62.
I think I've settled on the idea to take SS whenever an inevitable market downturn happens between 62 and 70. if all the sudden there's a Bear Market I'd rather keep the investment in instead of selling low. sort of a 1 time hedge. The couple years of drawing down after a downturn does the most damage to the portfolio. But this is also assuming a large enough nest egg that the money over time will continue to grow, and it's just about how much more would be left at the projected end of life. If you didn't have enough savings the retirement is more of a bridge to get to SS at 70, and there's nothing wrong with that either.
@@supermills03 Selling stock during a market downturn does great damage. My plan is to pull equity out of my house via a cash-out refinanced mortgage, during those downturns. Others are terrified of my approach, but I don't think they realize the damage that is done from selling stock during a market downturn. Plus, the chance of market downturns is nearly 100%.
I'm in the middle at 66. It's like the best of both worlds, especially if your best retirement years after Medicare are 65 -75.
THROW AWAY all the financial spreadsheets to start with. Then make a QUALITY OF LIFE spreadsheet. List WHAT you plan to do at each age from 62 to 95. Then step back and take a realistic look at it - International travel in your 70’s - maybe, but don’t count on it. Visiting your grandkids in another state in your 80’s, maybe, but probably not. I have 8 brothers and sisters in their late 70’s and 80’s and NONE of them travel anymore, either by choice or due to physical limitations. Front load your spending in your 60’s and early 70’s. After that its a downhill slide and all the money in the world won’t make it any better.
"Front load your spending in your 60’s and early 70’s. After that its a downhill slide and all the money in the world won’t make it any better."
Potentially spending your last few years in a Medicaid nursing home versus having enough money to age in place might make a bigger difference than you think. Front load your spending in your 60's and 70's has the same effect on your 80's as front loading your spending in your 30's does on your 60's.
@@wisenberI doubt he means spend everything and then live off of welfare in later life. More like plan on a higher withdrawal rate from 62 to 70, a bit lower rate from 70 - 75, way lower from 75 on.
@@SR-ob3wnYes
@FFL-vg9ro I really do not understand your point. Why spend most everything based on the possibility that you may not be able to do anything later? Do you know how long you will live and/or be able to get around?
When people say to me, "You can't take it with you" I reply, "True. But I do not know how long i will need it".
@@answerman9933 You need to do what is comfortable for your own self and what your life expectancy would be based on family history. Sure, you could live to 103 but you could also get hit by a bus tomorrow. One option is to factor out a portion of your portfolio as "longevity insurance." Let's say you have 5 million. You could factor out 1 mm and put it into a mental and financial 'lockbox' so to speak that you won't touch until the later phase of your life. For some people, that 'lockbox' is their House. Their primary residence is a final store of wealth that can be tapped if needed in extreme old age. There are lots of methods to drawdown wealth and putting aside a portion for emergencies (or extreme old age) is one of them. If I had 5 million I might profile out a retirement using 3MM as a baseline, lock away 1 MM for extreme old age, and use the other 1 MM for the first 20 years of 'youthful retirement' to do all the things you said you'd do when you finally had the time.
Kudos on not just a - typical for you, clearly and concisely explained plan - but just as importantly, showing a real world plan evolution I have not seen in a sea of pretty good Retirement Planning YT channels.
Most content providers go over-simplistic, showing only for a given retiree they should or should not pull SS early.
Without overwhelming, you showed the scenarios for the same couple where they should and should not pull early… and explained why it can be counterintuitive! Masterful.
And still in under 20 minutes.
And showed that the asumptions used MATTER, since the future is UNKNOWN. So knowing the variables, your situation, and taking the best stab at it using the known variables wisely (not deluding ourselves) is the best we can do .
When you have a physical job that you have done every week since the 1980's it time to retire at 62. 23 more months to go!
My husband's father took SSI at 55. Back then, that was the norm. He passed in an auto accident at 60. We were so glad he took it at 55. His mother had that 5 years of his SS to help after he passed.
I'm waiting for SS until age 70 because I view SS as an insurance and my goal is primarily security rather than to end up with the largest portfolio when I die.
Good choice.
Indeed. Social Security should be thought of as longevity insurance.
exactly, plus you don't have to wait until age 70 to make that decision. If you make the decision to take SS at 62 then you are stuck with that decision. If you decide to wait until 70 and something changes at age 68, you can take the money at 68.
The official name is: Old age, survivors, and disability insurance. Insurance against poverty in old age is its goal. There are over 1 million Americans over age 90.
Exactly how I always viewed SS. I think people used to call it Social Security Insurance.
As a retiree assuming 8.8% return is wreckless. Ss is most often a retiree’s best asset. Returns are fixed at 7-8% and adjusted for inflation. Sequence of returns risks is huge with invested assets so you must protect with less volatile assets. Everyone must choose for themselves but wow.
Hi Joe! Next in my watch list a Joe video! 🙂
Always take the bird in the hand. If you are not heavily invested in the mag 7 you didn't make much this year.
I’m glad he showed a comparison with a 6.3% return, which seems like a much better choice.
So curious why retirees would be so exposed to equities at this late age.
I agree that their investment allocation is wreckless for retirement. I plan to delay collecting SS until I'm 70 to lock in the higher inflation adjusted payment. But, the sequence of return risk really only applies to the first 10 years of retirement which basically covers the years when delaying SS and drawing down from your investments. A prudent strategy is to move some of your investments into less risky assets for the short term spending while trying to bridge the gap to when the higher SS kicks in.
What James left out is that NO ONE knows the future return rate of this investments. Could be 9%, could be 4%. Taking SS later is insurance against the risk of a low future return on your other investments.
This is our perspective
Exactly
Both future returns and longevity are the two big unknowns.
Could be -20% like last year.
I am working pass 65 and not enroll on Medicare part A and delay along Medicare part B until I retire due to I have an HSA without penalty.
I do that because not only I save $ for I expensive for my wife who hasn’t been working since 2009 , but also for myself if I retired at 66. The same increase 8% is fine while saving alit expensive health insurance at cost 25K per year !
I don’t have any debt and having pension and 401K plus saving ! Health insurance coverage at work is the best on earth
It’s the first time I see someone explaining the growth rate of investments impact on timing of social security benefits… very enlightening!!
SS is your bottom-line security. Other investments could crash hard.
Safer to delay social security if you can - everyone’s situation is different
Cash flow, cash flow, cash flow. For most people whether you’re retired or not, it is about cash flow. Currently I’m 69, still working, and about 11 months out from retirement. Because I waited until 70, my monthly net cash flow will actually increase by about $1500 a month. In other words when I retire, I will receive a $1500 a month pay raise. Very helpful in a high inflationary world. Obviously, there’s no advantage to waiting any longer than 70, but if you’re in good health, the advice I received from another retiree was to work as long as you can. I’m glad I listened to his advice. This will also greatly benefit my wife, if she survives me. Just don’t quit too soon, because you or your spouse may accidentally live till 90. 😊
You obviously are in good health not all are so lucky.
You work for as long as you can is an advantage in one situation and disadvantage in another. It all depends what you expect out of your retirement. Some people never retire and go to the grave without knowing what would it be like. You can not get it both ways.
Work as long as I can? Sounds miserable.
I live in Canada and if you make too much money you get nothing for old age security.
So you gave up 8 of the most active years of retirement so you can have more money to do less with. Nyet. I am not working until I am too old to enjoy life. To me, enjoying life does NOT imply sitting in a rocking chair waiting to die. I want to be active in my retirement years.
I retired at 65. I loved my job but it hated my health - I was on call 24/7/365 for 34 years. On my last weekend of work, the Saturday before Christmas, I took a 5 a.m. call. Within a couple months my blood pressure meds were cut in half.
I semi-retired at at age 60 after being on-call for 34 years as well. Another guy retired (Due to health) and they gave me all his responsibilities to be on-call for with no extra compensation and I gave them a retirement notice. My original plan was to retire at 62. I now work a few days a month as a contractor. My life is so much more peaceful. My blood pressure is back into the normal range.
I have a couple of years to decide whether to take SS at 62 or 70. I was leaning toward 70 but my analysis with a 5% rate of return changed my mind to 62.
I'm 70, and my wife is 77. My initial plan was to take my SS benefit at 62, for exactly the reason explained in this video. However, when I called them to set it up, the agent told me that I was eligible to receive half of my wife's benefit (with no impact on her present benefit or my own future benefit) until age 70, at which point I would automatically switch to receiving my own benefit. This was a no-brainer.
James, your ability to explain is exceptional. Thank you so much for sharing your knowledge.
Currently retired at 62 and 2 months. No rush to collect Social Security but will do so when it feels right. Great video.
All else being equal, the survivor benefit is more important in my opinion. I will delay my social security until 70 in order to leave my wife the maximum amount of guaranteed income. Break even age does not matter, I will use my portfolio and delay social security, It is the best way to take care of my wife.
This is my plan also. Women in my Wife’s family live into their 90’s
My plan also.
I waited until 70 for that exact reason. My wife only worked part time her whole life. If I died and all she had coming in was my SS at 62 it would be tough going.
"It is the best way to take care of my wife."
Yep. That's the way I see it and play it.
@@dhilbe11 My father took his at 65 and so did my mother. They lived well for 18 years. He received more, so she gave up hers to receive my fathers. But then it still cut her income. By then the property taxes went up by 200%. You think you plan for the worst, but actually, everything is in God's hands. Mom is 95 and she has lived a good life, compared to the conditions she grew up in during WW2 displaced from her homeland. Family happens. Don't wait until 70 because you don't know if 70 plus 1 day you won't be around. My father loved to drive...they drove all over the country three times. He broke down and flew to Eastern Europe as Communism fell to see his siblings for the only and last time . And then when he turned 79 he said he was done. Money does not make or define your life. I think mostly your family does.
We are all on borrowed time after 70. A lot of us after 65. We are planning and hoping to take SS at 62 for my wife and for me, we'll see how things are at work. I WFH and have a lot of vacation time. So i may work a little longer, well see how it is. But have everything paid off and enjoy your early years because all it takes is some medical event and you're done. Thise who think Oh I'll work til I'm 70 are fooling themselves. You probably won't. You have one life, no do-overs, go enjoy it.
Great video. I was reading people's comments, but everyone's situation is different. I was able to decide for myself what was the best case scenario. I highly recommend finding a planner that is knowledgable like James because there are so many variables. I love that James brings up all the variables that are out there, so when you are choosing a planner make sure they are looking at all the variables.
What a great video, I love the counterintuitive nature of this and was aware that there are arguments against waiting. This made it that much clearer.
That was a clear explanation. The title concerned me since I am 67 and was planning on waiting longer to start taking it. In my situation, waiting is still better. Thanks.
I am waiting until 70. Longevity runs in my family. The dollar is losing buying power so fast that taking early retirement for me was never an option. I knew this when I retired from my career job at 56.
Smart move !...
Same with me. Most people use the national statistic of US expectancy; pretty meaningless to any single individual. Based on my family history, I will likely make it to 95 just like all of my elders.
Yes. Also, if you are healthy and like what you do for a living, it's not work.
Thank You! Very few planners realize this loss of the gains effect on their portfolio when they delay taking social security.
James, this was a terrific presentation. Exhaustive and complete, showing all sides. Further, your tone, voice modulation, and calm consistent speech with just the right amount of voice inflections, made this entirely watchable. Keep up the great work. While I knew the general content inside and out before watching, so many people don't understand the interplay of all the variables. Great job, 10/10. Subscribed.
James, you explain things so well. Great teacher! I appreciate your insight. I’m retiring and collecting SS at 63 end of 2023. With my pension that has a 3% gaba, and SS I can retire now rather than waiting to 65 or 67. I’m considering quality of life as I leave a very stressful job. Priceless to my well being. It is such an individual choice and as a single person, I’m going to be okay tuning it all on now!
I'm approaching almost exactly your scenario. Still on the fence about some things.
One more thing to consider is that Federal tax rates are historically cheap right now so spending down your pre-tax accounts early while tax rates are low and pushing out the start of SS could make a large difference in the end. So many angles to consider. 😅
I totally agree
yeah basically max out whatever tax bracket you may be in while you can, convert 13k to roths you could basically take 117k if married filing jointly, get taxed at 10% and 12% on 89k with the standard deduction, contribute 13k to roths and have 104k per year, only taxed 10k total, if you had 2.6 million that's a 4% withdrawal rate when not counting the roth.
Your taxes will go up next year.
A Federal deficit of $34 trillion(not incl interest) and counting translates to higher taxes in the near future! And if the Govt goes to a CBDC (which they've been talking about lately) then SS might go bye bye altogether.
@@razorsedge1 SS is solid and always will be funded!
Also, if you delay taking SS for a bit you can do Roth conversions, delaying tax impacts, which may help in the long term. As you clearly stated, everyone's plan is different! Enjoyed the video, thanks.
Thank you for covering this. We are trying to decide when to take SS, and you clarified the fog in my brain of how spending the portfolio costs in future income.
Great points and appreciate James being transparent and showing how various assumptions affect the overall outcome. Also really shows how one's financial goals (short and long-term) impact how the assumptions/inputs are set up in the analyses and the ultimate predicted outcome.
Another excellent analysis. Numbers and math matter, but only within the particular situation. This causes me now to return to see how this might work in my particular situation, as I was assuming I should just wait until age 70 (without any particular context in mind).
James this was an excellent presentation. As a fellow MBA, I'd say you did a great job explaining all of the dynamics surrounding this decision. The reason that a lot of folks simplify it is because most households don't have a measurable retirement nestegg. Their retirement cash flow is basically Social Security plus a small amount of savings. They're told to keep working until you can maximize your SS cash flow.
I am enjoying the case studies immensely. James is using some extremes to emphasize different strategies. I would enjoy seeing more of these real life scenarios involving when to begin Social Security benefits.
EXCELLENT! Principle also works for Canada's OAS (excluding GIS). I just checked my decision model, and found out that I had left it at 4% portfolio average growth rate. There, taking at age 70 vs. 60 or even 65 made most sense with longevity as low as 82. When updating it to 6%, it bumped it up to age 97!
Thanks James! My family has long-lived genes -- mid 80s to late 90s -- about age 91 average, so, while ALL my friends are taking SS at 62, I and my brother are BOTH waiting until 70. I want and NEED the max dollar amount of the SS payments at age 70, and after THAT I can still work and earn without any penalty. I'm getting something like an 8 percent annual gain, compounded, between age 67 (my full retirement age) and age 70 before collecting.
I took SS at 70 and retired at 71 for all the reasons you stated, plus my wife will have that much more in survivor benefits when I pass.
This is what I plan on doing.I have a 401 k,also.So it will keep increasing,the longer I keep working.
Plus you're getting COLA on top of that 8%. Last year our return was 16.7% on waiting. Plus after 70 all those COLAs compound. Waiting until 70 all your future COLA increase will be about 75% more than if you took at 62. That difference is almost nothing in low inflation years but a real feel good moment in high inflation years.
We had no debt , a good 401k balance and we’re looking to retire early to start completing a travel bucket list. The travel required good health, reasonable stamina/ mobility/ etc….. things I was not confident I would have in my 70,s or 80’s.
During this decision process a friend said “If you were offered a job at 62 yrs old, that paid you $nothing until you were 70 yrs old( but then gave you a 8% raise, would you take that job? Oh…. and if you died shortly after turning 70….too bad?
Running the numbers for us….62 vs 70…. made a break even around 81 yrs old.
We wanted to use our health and mobility in our 60s and 70s to enjoy this big world out there;)
Thank you James for your thoughts on when to start SS benefits. One additional point to consider is that collecting social security at age 70 is equivalent to purchasing an annuity for the difference between the age 67 benefit and the age 70 benefit. Since you have this safe investment for the rest of your life, you can invest your portfolio in a more aggressive asset allocation and have the same overall risk profile that you would have had if you claimed SS benefits early and invested your portfolio in a more conservative asset allocation.
Very interesting analogy! Thanks for sharing.
Annuities have many issues.
It would be like purchasing an inflation-indexed annuity for that difference, not a fixed immediate annuity. Is that even possible?
Agree 100%. I get a 8% return on waiting plus a COLA and I know of no investment as securely as the US gov giving any inflation hedge. Plus of course COLA get compounded. Not a lot more, but I really like the feeling.
I think what you may mean is, an annuity without the excessive fees and commissions that give annuities a bad reputation.
Your content is outstanding and exceedingly well presented. No doubt you have many happy clients. Job well done!
So smart to call out portfolio growth rate and the loss of that if spending down while waiting to claim SS. I've overlooked this in my own planning, so I really appreciate you flagging it. New sub!
For most retires, the best way to view SS is as longevity insurance (for both spouses). Certainly it is nice for heirs to inherit a larger portfolio but….
Great video.
An even better longevity insurance is to skip the spouse part.
@@MrWaterbugdesignstatistically married people live longer than single people.
@@MaryLopez-em3rc What about bitter divorced people? Did theur being married make them live longer?
My simple brain says to take SS at 62, start getting what I've paid into for decades which will also take the heat off my investments so they can grow. Every day is a gift. I want what is due me and I know not my longevity. I could vapor lock before anyone sees this post! Carpe diem.
The world runs on statistics. Use them ad a basis for decisions about retirement, then adjust accordingly.
Wish you the best ... for me holding off SS till 67 seems like the way to go ... if i am not here, i want my wife to be in as good a position as possible to live out the rest of her life and guaranteed SS income should make that possible ...
it doesn't really matter when we take it, take it early it pays out less for longer, take it later it pays more but for shorter period. It's a wash really. All you have to do is know if you can survive on the amount you get when you retire. Of course if you have been managing your money SS should only be about 1/4 of your expenses at most.
James, Excellent presentation on how looking at SS alone doesn't give an accurate answer for when to begin collecting. We must look at this question in the context of our entire retirement plan. I'm going to do that right now in my Maxifi plan. Then I 'm going to watch a few more of your helpful videos.
Thank you.
Steve in Concord MA
Great video looking at different scenarios and factors to include in a financial plan. Thanks!
Everyone's situation is different. This was a good video showing multiple scenarios but the 8.8% return in the first analysis is in my opinion too high. Also, a lot depends on how much you have in retirement assets compared to what you expect to get with social security. I retired at 50 and have been living frugally off my IRA (401K and pension conversion) for 16 years now. During the last few years with Covid and other life events, my spending has been low so I have been doing Roth conversions so that when I do start taking Social Security I won't be hit by the tax torpedo. Taxes was one thing that was left out of this video which definitely has an impact. Another thing is that Social Security is more reliable (in my opinion) than market returns so maximizing Social Security can give you some peace of mind. Having a guaranteed Social Security base income for mandatory living expenses allows you to splurge with your other assets when the market is up and maybe cut back a little in lean years.
Concur. I would use 6%
Fixed incomes are degraded every year by annual inflation. We just went through two years of peak inflation. Very hard on a small fixed income.
Another way everyone's situation is different is their job. For some people working a few more years is not a big deal. Others are done with the grind and would rather live more frugally for a few years than continue full time work.
Very well put.
Another cost of investing is stress. How do you feel in down turns? Put a value on that. And even booms can create stress like FOMO, when to get out, rebalancing, etc... I retired 22 years at 45 and have only had a savings and checking account. I absolutely had proven to myself I suck at investing. I gambled instead of invested. Just no interest and I sure didn't want that job. I stuck with what I love, slow flipping houses and watching my SS estimated payment grow.
For me, the glass is half full and my focus is living versus how soon I will die. I planned for the future and maxed out my 401k annually since starting my first job out of college at the age of 22 and it grew for over 35 years. My savings then 401k will comfortably carry me to age 70 when I will then take my SS and pension.
this is a great video. numbers can be spun any way you want to direct 'clients'. you offer complete analysis, which will have different results for different people.
James - you've been working out! Great analysis thanks.
Exercise on a consistent basis can prevent 45 different diseases. Keep that in mind.
One video I’d like to see, and haven’t seen on any of the channels I follow, is one where people retire early and can be flexible with their spending. In others words, sure go ahead and spend 5 or 6 % or so in the first few years if your returns are good, but cut back if they aren’t. I know you’ve done a video on Guyten’s guardrails, but I haven’t seen a case study about how willing people are to be flexible with their retirement spending. As a recent retiree, my bet is most people will automatically cut back if they have a poor sequence of returns.
Thank you for doing the details.
I am an engineer who loves spreadsheets and I came up with the same conclusion.
It is hard to know when to take SS because we do not know what the markets will do.
Assuming you want to retire before 70.
If the markets do well it might be best to take SS early and allow your investments to grow
If markets do poorly it might be best to pull from your investments and delay taking SS.
In my case I will retire at 67 1/2 and will be delaying SS to 70.
I only need to take extra money out of my investments for 2 1/2 years.
If you do the math, retiring at 62 and taking extra money out for 8 years vs only 2 1/2 years has a big difference in your decision.
Excellent explanation of the factors to consider for this critical retirement decision!
Good analysis James, thank you.
It’s easy to say you will use an 8.8% asset growth rate when you look at the past 5 - 10 years with all the effort to prop up the market until the past year. Also easy when you currently have employment income and you are adding to your portfolio. Would be interesting to see what rate of return they will expect once they no longer have employment income and possibly experience a few negative years upon retirement.
The mistake is assuming you're going to live to 100. There's no guarantee you'll even live to 70, so waiting until then to retire is insane to me. Enjoy your life and retire at 59 1/2
My MIL retired at 80. Husband left her after 40 years of marriage. She landed a good paying job at 65 so she needed to keep working to build up SS and 401K.
There is no guarantee you are going to wake up tomorrow.
I would rather my money outlive me, than me outlive my money.
Yep my husband has a cardiac problem and he almost died. Praying that he lives another ten to fifteen years. 👃
Even if you live to 100, you'll likely be in diapers and wheelchair for the last 10 to 15 years. I guess they can buy premium diapers with that higher SS check.
I did 😊
Age you retire need not equal age when you start drawing SS. I retired at 50, won't draw SS until 70, which is now just two years away.
Well done presentation. Thanks for the video!
One who has studied and written many Excel spreadsheets for my investments and retirement plans I can say this is one of the most honest and refreshing presentations on retirement income and SS benefits I have ever seen. It's great he evaluated different rates of return and different times to collect SS benefits. Would be interesting if he evaluated the spouses who are the same age staggering their SS benefit claims (i.e one claims at 62 the other at 67), this helps tremendously with the survivor benefit (kinda like an insurance policy). Very well done, accurate, and honest.
Let's talk about reality, most people haven't planned to be physically able to do much in their very late years, hence the term "go go years", where you travel and have fun until you're too old and have lost the desire, your results may vary. Most people are going to stop being adventurous and taking those expensive trips past 75, so you're not going to need as much money then and you're going to care less about having fun. Waiting until decrepitude to get your maximum benefits makes no sense. And I don't recommend it, but I've been retired since age 57 and I'm 65 now, but I had no insurance during that time. I'm healthy and now have medicare, so dodged financial ruin. You're going to draw more early because you're trying to have fun, but as you ease into watching Wheel of Fortune every night, you're not going to need to draw that much. Quit worrying people, live your lives
That'd why I maintain that the best (do almost anything) retirement years for relatively healthy adults are 65 -75.
Just a note: You can be adventurous without breaking the bank. 🙂
Another issue that is almost always overlooked is that maximizing lifetime SS is not the only goal for some people. SS is a kind of insurance. If your investments don't do well or you live much longer than you project having a higher SS payment can be a life saver.
Technically, it is not insurance; insurance is not a US governmental power. It got past that by being called a "pact between the generations." However, it is the most reliable post-retirement income available.
Also your SS payments have legal protections that your assets don't. If you are well off, delay taking it for this reason only.
This. It's the only pension the majority of us have, I'd prefer to maximize it for possibly long years.
Nice analysis. I ended up starting SS around age 68 because I had a kid starting college then and it was an easy way to adjust income to match expenses. The flexibility to use SS in this way, as a net income leveler to counter a large-but-predictable increase in expenses, has some value but is rarely discussed.
I have watched several YT videos about this subject. This analysis does an excellent job of taking into account the whole picture, and was very well done. Only additional topic to include for tax minimizing is Roth conversions, otherwise good video.
There is also longterm care that needs be saved for or having insurance for it. It costs over a 100,000 annually.
More like $180k+
None of my many relatives needed more than a year of LTC. I think it is overblown. What is NOT overblown is dental care costs not covered by insurance. It can be substantial if you have most of your own teeth.
Great explanation but both collecting at 62 with no other guaranteed income could present a financial problem if one of them passed away at an early age.
True. There are many trade offs to consider.
Very good presentation! Very glad you compared different interest rates; that factor is so often completely overlooked! Thank you.
I’m glad it was helpful
I just found your channel in my feed and I really appreciate how you laid out this strategy, as I was able to follow it without nodding off. Looking forward to watching more. Thank you so much! Also, I am single and wonder if you have any strategies to help maximize my retirement.
Did I miss something? Where was the part where they start getting hit with RMD’s in their 70’s? The RMD’s on a million plus is pretty hefty and could result in some really high taxes. Hence the term tax torpedo. Waiting to 70 does three things. One, it gives you time to do Roth conversions and pay the taxes now vs later, especially before 2026 when the tax rates are supposed to go up. Two, it has you using more of your portfolio now to live on. This helps to reduce it, keep it more manageable, and makes you less dependent on it. Three, you have a better mix of SS vs Other income in the provisional income calculation, which results in lower taxes. I have done the math both ways for my personal situation and waiting to 70 is the only way to go. I can significantly decrease my tax liability and grow my portfolio higher in the long run. This is an important factor. Perhaps even the most important factor for this couple in my opinion.
Wonderful analysis. That is my point that the last thing you want is an IRA with several million dollars in it when RMD's kick in while taking SS at 62. The last determitive factor for me was that I was 8 years older than my wife and have a SS benefit that is 4 times my wife's.
determinative instead of determinitive.
I don’t think the RMD of $37,800 on a million for someone turning 73 this year is hefty.
@@Satjr35031totally agree, but our RMD’s will exceed our needs, because we will have about $7000 per month in SS income. So the best of both worlds. I don’t care about saving the last tax dollar, I only care about cash flow to meet my needs. With a high check things are more predictable and I don’t need to worry about market return, I can decide at the time how many vacations I want to take and whether I want to take luxury cruises(not my thing, lol). Even just the survivor check allows full solvency since we have no debt, should one of us die early. And even with a 50% market crash we would only lose 25% since we are not heavy in stocks.
@@Satjr35031There is another channel called Heritage Wealth Management. That guy is really good and does an excellent job of explaining the provisional income calculation and the tax torpedo. The problem is not the amount of the RMD but rather the way it affects how much of your SS is taxable. 30% to 40% and even up to even 50% provisional tax rates are possible and highly likely. Good financial planning tries to head this off because good financial planning always seeks the best tax advantage. This is just as true in retirement as it was when you were working. The problem with a lot of these break even calculations is they do not consider tax. Why? Because financial planners are not accountants and so they don’t consider tax. Their goal is to preserve your portfolio at all costs, and this just so happens to be how they make their money since they get a percentage of that portfolio. So of course they want you to take SS at 62, but that does not mean it’s the best and least expensive opiton. The bottom line is if you walk into the office of a qualified tax accountant who understands retirement with over a million in pre-tax AND you have the time to do something about it, then that expert is going to tell you to do something about it!
Great video and analysis. I went through a similar analysis and discussed with my Fidelity advisor last week - the opportunity cost of waiting to take social security. To me, the takeaway is that once you stop working, you might consider taking social security immediately, because you'll likely never make up the amount you completely fund from your savings vs the combination of social security plus savings. In our case, we'd have to fund $116k until age 70, which moves the breakeven point much further out. And $116k doesn't consider the lost opportunity of investing that money throughout our lifetime.
Good plans
Most people who quote invest money lose money. Onloy someone whose on deasth's door should take social secuoirty before age 70.
The Social Security Administration has done an extensive statistical analysis of mortality rates, and on average there is no significant advantage of starting at any age from 62 to 70. Only individual characteristics that may differ from the expected norm might influence the actual age of starting SS. Several factors determined that I start SS at 70 and my wife at 62. My annual income was several times hers, I am 6.5 years older than she is, I expect to die in my early to mid 80s and she in her early to mid 90s, and she will get my SS benefit level when I pass. Thus me starting SS at 70 gives my wife much greater income after I'm gone.
@@roger7341 that is because there estimates don't take into account the time value of money. there breakeven ananlysis only takes into account benefits received (1st example in the video).
I am subscribing for a few reasons. 1. It's always a good idea to hear from different folks so I can get different ideas. I'll be 66 later on this year, so for my SSA filing will be FRA or maybe a year later. 2. I have a call with my bank this week to actually go over some financial planning stuff, so I will be asking the questions about rate of return and such things. 3. You gave us a nice clean video WITHOUT MUSIC. I can't stress how great that is. So many YT hosts think 'background music' is a good thing. No it isn't. It is a real PITA. Again, thanks for that as well as the good info.
Very informative. Thank you professor beige.
Excellent explanation. Now if we could only know how long we will live, and our future ROV, we could figure out our best age to start SS. Thanks.
Grab the cash as soon as you can still, and LIVE YOU LIFE! Guaranteed you will regret not making the most of your 60’s. Maybe you can be sort of active in your 70’s, but odds are not in your favor. After 80, you are likely spending 98% of your time at home, or at a care facility, counting your growing portfolio until you die a multimillionaire at 95, not being able to recognize most of your family for the past 5 years.
65 - 75 are the best retirement years.
I’m an early retiree, people think I am crazy, but I have excellent pension income, free medical for life and we have saved a lot of money. If we continued to work into our 60’s we’d have above $10 million minimum. I don’t even know what I would do with that kind of money in my late 60’s/70’s. I’d rather start working on my rather long bucket list now instead of being a wage slave for 20 years and fabulously wealthy in my 70’s.
This is brilliant. Thank you.
Watching this video with great interest. We already decided to wait until 70 to collect the larger amount as we are still working very part time at age 68.5. We are already enjoying the perks of semiretirement by doing all of the fun thing's retirees do and there are no "opportunity costs" involved. We also have other sources of income in addition to our investments. Hopefully we made the right decision as that end point is coming soon.
Great video James! You did a wonderful job illustrating the effect that waiting to draw SS could have on someone’s retirement account instead of just looking at how much more money someone could receive from SS by waiting until 70.
Don't forget this couple's aggressive investment strategy. That factor was the just as illuminating as the SS timing because with typical investment returns, delaying SS would have been the better choice. It's never just about one factor, it's a combination of many and changing any one of them requires a re-analysis of the whole plan.
What about a split projection where the lower earner takes at 67, and the higher earner takes at 70?
Unless the laws change, this is our expectation.
Finance professional here. His analysis is correct. Opportunity cost really is the key here. You do have to weigh the higher return on your own portfolio vs. the higher amount from SS at 70, and the latter doesn't add as much as you lose on the former in the meantime.
Great video. My dad took social security as soon as he was eligible and he never regretted it.
Couldn't agree more. Spend social security first. The future is one big unknown and any money you can save out of your own portfolio is yours. What if you needed $40k for a car? Better to have a larger pot that is yours. Unless of course, you love your job and don't want to retire. I took SS at 62 early this year. I also have a pension with an annual cola. Paid off the house with savings and a small IRA withdrawal. Money is a little tight due to health insurance, but enjoying not working. Don't even worry about break even. Delaying until 70 means an extra decade of giving your healthy years to an employer and not yourself and your own pursuits.
I like starting SS at FRA. Then you do benefit from some delay in collecting, but you aren't rolling the dice hoping you at least make it to age 71. 🙂
Thanks, you got me thinking.
Fascinating analysis. One other factor that applies to many, is the risk tolerance. If you're dependent on your investments to provide income, you might not want as risky an investment allocation as those that have other income sources. If SS and let's say, a private pension meets most of your needs, you can tolerate a lot more risk and get a higher return (overall average). And thus, your concept of drawing SS early makes more sense.
If you depend on your portfolio for a large part of your income, you might be more conservative and then waiting on SS is the right choice.
This was very illuminating, James, and it changes how I was thinking about SS. I was dead set on delaying until 70, but I too plan to maintain a more aggressive investment strategy when I retire, probably sustaining 8% returns. My plan was to retire at age 64, do Roth conversions until 70, claim SS at 70 and focus on maximizing income throughout 30+ years in retirement without risking running out of money. Now I'm wondering if claiming SS at 67 or even earlier would make a significant difference over the long term, given my other objectives. Well, back to the spreadsheet.
Good one!
Do you have any particular retirement planning programs you use in your analysis?
Remember the 5 year rule on ROTH.
My greatest fear is to die destitute so planning on waiting until 70
It's like good insurance...you'll feel better having done so down the road ! I did.
EXCELLENT JOB!!! This is done very well. You could mention that the effective rate of return on SS is about 8 percent if you wait. By 70 it is a little less than 8 but this is the reason for your example difference.
I'm 59 and this info is gold. I have saved it as well as subbed and liked.
I do see your point. They can’t wait until 70 because they do not have enough to cover the expenses before they turn 70.
That’s not what he said.
I haven’t seen a Social Security analysis that discusses the trade-off of waiting to take Social Security at 70 versus taking it at FRA if one spouse has a large benefit and the other gets the 50% spousal adjustment payments. If one spouse passes before 70 - or even before age 80, the remaining spouse loses the 50% extra income and the break-even for waiting would be much later.
same. I hear plenty of experts with various but not anything for me to try different scenarios.
Yes, I agree. To do justice to a couples Income plan you must include a scenario that has one of them passing early into retirement!
Yes that's an argument for one spouse taking early. the survivor benefit is capped anyway.
Its all Smoke n Mirrors with so many variables. SO the best case is whatever you are comfortable with because waiting for 10yrs to break even on SS vs expecting to live longer in a stock market with assest that will eventually have pulls back limits your real outcome.
This is so true. Ive noticed the same thing for me. Note that the model I use is very sensate to the interest rate assumed.
I have been thinking about this the other day, I am not gonna wait until i get to deaths door to collect SS. I want to still do things and enjoy life a little bit. So, I will definitely take it at 62, but because I likely won't be married, I will have to live within my means. Also, I will likely be renting for the rest of my life although I am looking at options like maybe living abroad and visiting the US 6 months out of the year by using AirBnB
I really like the way you teach about financial topics. I think it is very unwise to plan on growing my portfolio until age 95. I would love to see an analysis like the one you did but with the goal of having less than $100K by age 95. My plan is to spend my last dollar before I die. And hopefully die even owing lots of money (which of course I"ll never repay from the grave)
Why would you purposely choose to screw your creditors out of the money you owe them because you died before you paid them back? Immoral and what a lousy way to end your life
My father was a life-long actuary (RIP) and he always preached the concept of long term accrual vs risk avoidance and periodic adjustments. You laid it out perfectly in this video. In your depicted scenario the subjects, if spending cash too quickly, could cut lower their spending & still be solvent. If investments go flat, same thing. The opposite also holds true as well. Just stay away from boats ;,)
Very good points. Subscribed and want to hear more. 👍
With good longevity in my family, I started at 70 and next year it will be 4700 next year. My wife will take hers in two years, she will get 2400 a year. Thus we will get 7100 a month from SSI only. Sweet!
The other huge assumption in the pro forma is the assumption the SS trust fund will still be around in ten years! This country is 33 trillion in debt, dollar value is falling, and SS enrollment is exploding. So pulling from your private retirement account early is foolish in the event SS is not around or reduced in ten years.
You must've been a CEO making big bucks for many years!
@FordF250Tremor
Nikki Haley mentioned some of her "fixes" to the upcoming SS shortfall was to raise the retirement age and reduce benefits for the wealthy. That last one has me concerned. At what level will someone be determined to be wealthy and forced to take a hit on their SS benefit. I'm 67 and choosing to wait to 70 to collect but I don't want to end up being a chump if my benefit ultimately gets cut because I have too much in my 401K/IRA.
GOP is considering cutting SS payout by 25% have you been paying attention? and Trump just said he would consider that.
Great video James. Another consideration in all of this is how volatile the market is while withdrawing from investment funds. Market volatility is a big risk and why the so called conservative 4% rule works for worst case scenarios since, if the market is way down when early withdrawals are made while delaying Social Security, then this would have even a bigger negative effect on the portfolio even if the long term average rate of return was 8.8%. Keeping this in mind, should the decision to take or delay Social Security be based on what the market is doing or at least projected to do in the years between age 62 and 70? Of course, no one knows exactly what the market will do which is why this decision is very difficult and not as straight forward as some would suggest. One other thought - is your monte carlo analysis taking market volatility into account when doing these comparisons? Would love your thoughts on this? Thanks for your great content!
I just saw your post aftr i posted to another "I agree that a "cleaner" way or another way would be to use the 10-year yield of 4.8% on the deposits without risk, but I'm just a college dropout.
Regarding Monte Carlo analysis, it's hugely dependent on assumptions made. Need to consider equity returns, equity volatility, interest rates, bond returns, correlation between bonds and equities, and inflation. I like the method of stress testing a portfolio strategy using the last 50 years of historical outcomes. We've had periods of high inflation, low inflation, strong equity returns, flat returns, multi-year bear markets, rising interest rates, falling interest rates, etc. It really boils down to the inflation-adjusted portfolio return. The nominal portfolio return has no meaning. 5% can be very favorable if inflation averages only 1%. But an 8% return can be devastatingly bad if inflation in running at 6% and you were counting on a 4% withdrawal rate. Those who retired in 1965 squeezed only 1.5% of inflation-adjusted returns from equities over the next 30 years. Those who retired in 1992 have enjoyed a 30-year period of 10% equity returns and only 2.3% inflation. Using historical outcomes also captures real world sequence risk. How would your plan have held up if you retired in 1985 and the stock market crashed two years later?
I retired at 69 because I made a lot of money those last 5 or 6 years. It really boosted my savings and my Social Security check enough that I went from wondering what I would do when I retired to being able to thoroughly enjoy these last years.
Excellent analysis. Thank you.
Great job
But can there stomach handle 90% stocks in retirement. I personally don't want to be in retirement with 90% stocks and hoping I get 8.8% after investing expenses.(which you mentioned later in video)
Agree - a bad stock market decade like USA in 70s and Japan for two decades would blow up 90% stock allocation.