the loaded "when should I take social security" question

By Justin Bolmgren

The question inevitably comes up “When should I take Social Security?”  Simple math tells us the answer should be to delay taking benefits and collect full retirement at age 66.  But is “simple” math all that is involved?  Perhaps, especially if you or your spouse are still working, don’t need the income, or have the longevity gene.  However, in cases when someone is already retired, the decision becomes more compelling to take benefits early.  The short reason; delaying Social Security retirement income requires many retirees to fund monthly income needs by taking distributions from retirement savings.  How could collecting reduced Social Security benefits at 62 be more beneficial for my retirement goals?  To explain how, let’s look at a scenario.

Some Facts; Bob is retired, has average health and is age 62.  He is contemplating taking Social Security Retirement at 62 or waiting until full retirement age at 66.  Bob has $300,000 in CD’s saved for retirement and needs $2000 per month in living expenses.  His monthly Social Security at age 62 is $1275 and $1700 at age 66.  Some Assumptions; Social Security cost of living adjustments will continue at the last 10 year’s average of 1.99%.  Also, let’s assume Bob’s life expectancy matches the Social Security Actuarial Life Tables (about 20 years).   Lastly, Bob’s living expenses will need to increase at a rate of 3.5% per year.  Some Thoughts; If Bob waits until 66, he will need to fully supplement his income between 62 and 66.  This will deplete his savings faster those 4 years than if he took Social Security early.  However;  when it does begin at 66, the higher benefits make up for lost time, so to speak.  Some Results; If Bob were to invest his retirement savings in CD’s earning an average of 1.5% per year, he would be better off delaying his Social Security Benefits until 66.  At the end of 20 years, Bob would have $27,909 if he started collecting at 62 and $31,167 if he collected at 66.  Done and problem solved…exactly what we thought, right? But what if Bob invested his retirement savings in a laddered bond portfolio that averaged 4.5% per year?  The compounding of interest would outpace Social Security cost of living adjustments and take a bit of the burden off of inflation.  At the end of 20 years, Bob would have $242,254 if he started collecting at 62 and $208,024 if he collected at 66.  So, in this case, Bob would be better off collecting at age 62.  In fact, if Bob could earn any rate of return on his retirement savings higher than about 2%, he would be better off collecting Social Security benefits early at 62!

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