Early Social Security election

Submitted by Joe Rys on Wed, 2018-12-05 22:27

I frequently read that it is better to wait as long as possible to start taking Social Security benefits versus electing to start at age 62. I understand the whole concept that most people will live longer and therefore you will have a larger income stream from social security if you delay on starting benefits.

I have run several spreadsheets however and assuming reasonable rates of return ( ~5%) from an IRA – and the math under those assumptions show that the retiree’s assets and therefore income stream can actually be equal to or larger if you elect at age 62 versus later to receive benefits.

So my question is, does the assumption to delay social security benefits as ALWAYS being the right solution for retirees ever factor in how the higher withdrawal rate on personal savings (i.e. IRA/401K) will impact the overall size our your client’s net worth (including security benefits)?

Thanks



Submitted by William Tuttle on Wed, 2018-12-05 23:35

  • The results of claiming age are relatively actuarially neutral.
  • The attempt to maximize total return is a classic behavoral finance attempt to avoid regret and the idea of keeping score.
  • You only know if you have “won” after you and optionally your spouse are dead.
  • All of your spreadsheets and the other models are based on probabilities with unknowable outcomes.
  • Assume that the “probable” total return is the only useful metric.
  • If you collect at 62, live comfortably but die at 70 substantial ahead of the game of someone who has not started collecting and leave a substantial inheritance, have you won?
  • If you collect at 62 live comfortably until you die at 90 as you run out of money, your spouse lives five more years destitute, have you won ?
  • This ignores that longevity Insurance especially for a surviving spouse is a crucial consideration.
    • We do not insure for the likely outcome, but the worst case.
    • If you live comfortably but die without ever collecting SS at 70 have you lost?
    • If you collect at 70, live comfortably until you die at 90 as your spouse lives five more years with a very comfortable lifestyle, have you lost.

    The correct answer is the personally correct one based on ach individuals priorities. Not everything can be reduced to proababilites, spreadsheets and models. We do not know the date of our own death.

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