When to draw Social Security

[lcarpenter79]

claiming Social Security early has a benefit that is rarely discussed. The combined annual benefit for my wife and I is about $45,000. Drawing this amount instead of withdrawing this from our IRA, allowing this amount to grow within the IRA. If invested in an S&P 500 ETF, this has earned roughly 15% each year for the past 3 years. In addition, the COLA has been 8.7% in 2023, 3.2% in 2024, and 2.5% in 2025. The ability to keep the equivalent amount of SS payments invested should be a consideration in everyone’s decision for when to claim early vs waiting to claim SS at full retirement age. My breakeven for claiming early is around 90 years of age, due to the investment returns… my recommendation is to claim early and stay invested!!!

[Tonster521]

lcarpenter79, your analysis is the correct approach for folks who have other financial assets such as IRAs, 401Ks, brokerage accounts, savings accounts, etc. I am providing a link to a SS Bulletin that addresses how one's  discount rate is an important factor when evaluating when to start receiving SS Benefits. https://www.ssa.gov/policy/docs/ssb/v76n2/v76n2p1.html Hopefully, I copied and pasted the article correctly.

The article uses math and actuarial concepts which are difficult for folks to understand. Essentially, the results are based on a concept called the "time value of money". Rather than focus on length of time, it develops the discount rate that one needs to obtain for the optimal SS Benefit claiming decision. For Males, the optimal claiming age is 62. This is based on obtaining a discount rate of approximately 3.8% or greater. For Females, it is also age 62. However, due to a longer average life expectancy, they need to obtain an approximate discount rate of 4.3% or greater. 

The article explains when it is financially sound to receive SS Benefit using math and actuarial concepts. There are many more articles and studies concerning when to start SS Benefits. However, many just focus on how to receive a greater monthly amount. Some consider the time value of money, but most do not. In my opinion, the biggest myth is what TRL1111 posted advising that one's SS Benefit will increase by 8% per year of delay. However, most folks forget to factor the loss of delaying SS Benefits for 3 years (ages 67 to 70) which is an upfront loss of 300%. Although one's SS benefit is 24% greater, it will take 12.5 years (300 divided by 24) to recoup that upfront loss. That time factor (12.5 years) is based on a 0% rate. Who earns 0% for 12.5 years? Using equities and/or treasury securities will increase the time factor to greater than 12.5 years. In many cases, folks will not live long enough to recoup the up front loss. The greater one's discount rate, the longer one needs to live. So, for folks who have other retirement assets, it is not a financially sound decision to use one's retirement assets in lieu of (delaying) SS Benefits if one has stopped working and earning  rates greater than the above posted rates for Males and Females. Remember, use your asset allocation for all retirement assets, not just the S&P500 which has been recently "knocking the ball out of the park". Everything is OK until it is not OK. Good Luck.

[TRL1111]

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@Tonster521 wrote:

Everything is OK until it is not OK. 

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That was my point.  The recommendation was to claim early, and it was based solely on investment returns.  That's bad advice, and would still be bad advice even if the investment return produced by delaying claiming social security is considered.  I wanted people to be aware that there is a "return" on delaying.

Other things need to be considered, too.  Like spousal benefits.  In some situations, things need to be fashioned so a surviving spouse can collect the maximum benefit.  But it might not be necessary in other situations.  

And of course everyone's financial situation is unique to them. 

It even can be an emotional decision.  There are lots of people who say people should never pay off their mortgage if they can earn a higher return on their money than their interest rate.  It's never as simple as that, even mathematically.  And it completely ignores that some people prefer to be debt-free, and that being so is worth something to them.

It's a gamble no matter what you do.  Nobody knows what their investments will do in the future, and that disproportionately affects older people, who don't necessarily have a long time to ride out bad times.  They also usually don't know how long they're going to live.  Both of these are vital pieces of information that nobody has access to except maybe somebody who's under 70 years old and on their death bed.  For everybody else, it's a gamble based on some guesses.   

Same with Medicare, and even worse with Part D plans, where to make the best decision, you need to know what drugs you will be prescribed in the upcoming year, and how long you'll be taking them.  

I think it's not great that people have to made these complicated decisions, and in some cases suffer the consequences for the rest of their lives.  It would be nice if there were really obvious choices, and maybe just a few outliers would be better served doing something else, but that's not the case.  So we have a system where there are a bunch of moving parts overlaid with uncertainty on pretty much every front (including the mere existence of social security way on down the road); that's bad enough, but offering advice like "claim early and stay invested" is unhelpful.  

[SereneSeagull]

Well said, @TRL1111 .  Totally agree.

[fishdoggy1]

There are so many variables for this decision and best projections can end up wrong. People should do what you are doing and look at when you will have the same amount of money by waiting till you are 70 versus taking money early and investment income in the mean time. The fact that SS payments are also inflation protected is better than a lot of payouts. My wife and I waited till 65 to draw but retired at 62, lived out of money saved and about $12,000 of IRA withdrawals each year. Now age 70 don't regret being retired all these years one bit. Life is like a toilet paper roll, it goes away quicker near the end.

[TRL1111]

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@lcarpenter79 wrote:

My breakeven for claiming early is around 90 years of age, due to the investment returns… my recommendation is to claim early and stay invested!!!

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More accurate would be to say "due to the anticipated investment returns."  Don't forget that past performance is no guarantee of future results.

Also, if you delay taking social security, you'll get a higher benefit, permanently, once you do start taking it.  And it's not insignificant--the increase is 8% per year after your full retirement age.  That should be factored in when evaluating the risk of being in the stock market.

Just like with Medicare, there is no one-size-fits-all recommendation.

[Tonster521]

TRL1111, please see my reply to lcarpenter. I suggest that you review the SS Bulletin that I linked. It should be noted that the SS program uses the same formula for everyone. There are not multiple formulas for male and female, one having other retirement assets and one not having retirement assets, and so on. There may be changes in the future such as "means testing" when developing one's Primary Insurance Amount (PIA), but it has not yet been enacted.