When To Take Social Security

The Landscape Has Changed Due To Interest Rates

Common thinking is that it is best to delay taking Social Security until full retirement age or even until age 70. It may make sense to wait until age 65, as the cost of health care insurance can be a huge factor. However, I started taking Social Security in March of 2014. This was before I was 65, so I needed another type of health insurance for about two years. If I were 63 years old today, I would be even more likely to take Social Security before my Full Retirement Age (FRA). The reason is simple: interest rates make the delay less attractive. I will explain why this might make a difference in this post.

I have received almost a quarter of a million dollars in Social Security benefits the last nine years. Those dollars were primarily used to avoid withdrawals from our retirement accounts. There are certainly some complexities related to the timing of your retirement from full-time employment. These include the sources of income, any loans you are still required to repay, the costs of medical insurance, and your overall expenses. The easiest way to determine what works and what won’t work is to add up your income and your expenses and see if income is more than your cost of living.

Interest Rates and Taking Social Security Later

One of the contributors to the Fidelity Investor Community is Dick. Dick said this in a recent thread about when to take Social Security: “Folks tend to take a shortcut regarding ‘8% more.’  That’s 8% of 2-3 thousand dollars.  A bit less saved and compounded at (say) 6% will quickly overtake it.” What he is saying is that you are “promised” 8% more for every year you postpone taking Social Security. In other words, if you receive a $2,000 per month Social Security benefit at age 64, by waiting until age 65 you would receive $2,160 per month. If you waited until age 66, you would receive $2,333 per month.

This does seem to be attractive. The problem is that it ignores the fact that you can easily earn 5.3% with simple FDIC-insured investments in Certificates of Deposit (CDs). So your eight percent isn’t really all that wonderful, especially if you can afford medical coverage with your sources of income. Depending on your cost of living, you might benefit from investing your Social Security income.

Dick also had this to say, “For what it’s worth, I started taking SS at 64 when I retired rather than 70 despite the fact that we did not need it.  The SS payments went into the portfolio and basically doubled in those six years.  I began my 70th year with about $250k in additional principal versus the higher initial payment schedule. By my math at the time, my smaller monthly benefits plus the earnings on the extra $250k plus possible future draws on the $250k to supplement income needs put my “breakeven” at about 106 years of age (just assuming 6% interest rates).  Delay seems even less beneficial with today’s higher rates.”

Helping a Friend

I have been helping a friend think about when to retire. I created a spreadsheet for him that lists all of his potential sources of income, including Social Security, and all of his ongoing expenses. The result seems to indicate that he could retire today based on the numbers. That is the exercise I encourage you to consider when determining when to take Social Security. You should have a budget and you should understand your cash flow. Do you have, or will you have, enough income to cover your costs?

A Few Reminders

Some states tax Social Security benefits. Some do not. It would be wise to know what your state does.

Are you married? If so, think about how your decision may impact your spouse. The higher wage earner may want to wait until age 70. The lower wage earner may want to start Social Security much earlier.

Do you have income from investments? These can help cover your costs of living if you have a good flow of interest and dividends from those investments.

You may live longer and see 80 or even 90, but you may not have enough strength and health to enjoy doing what you think you might want to do when you are in your 70’s and beyond. I can enjoy life (and have) because the Lord and Great Physician has given me a reasonably healthy decade. That might not continue. So taking Social Security gave us more options and opportunities for living life differently. This included two trips to India, taking a granddaughter to Hawaii, and several trips to places like San Diego, West Virginia, Montana, and Louisiana.

I’ve had far too many friends die shortly after starting Social Security and even before they took their first payment. I understand I might have received more if I waited until age 65 or age 70, but I was able to spend the dollars sooner for life’s basic costs and avoid IRA withdrawals. Furthermore, even with inflation adjustments, SS does not keep up with inflation. If you look at the increase in the Medicare 2024 cost, the COLA increase will be less than 3% for most individuals.

Finally, a bird in the hand is worth two in the bush. You may not have tomorrow. Consider your mortality when making life decisions. Read the book of Ecclesiastes as a reminder about life under the sun and also about what really matters.

A Word to the Wise

If you want some help thinking through retirement, I can provide some answers. You might also want to visit the Social Security website. Here is a helpful LINK.

As I often repeat, Social Security is a nice annuity. However, it is certainly rarely enough to cover the real costs of living in retirement. I believe it is wise to save around 10% of your income during your working years so that you can live off of your investment income when you are no longer working full-time for yourself or an employer.