Author: Dave

When people get close to retiring, they start thinking about social security.  One of the main questions is about when they should start taking Social Security.  For younger people, the Social Security full retirement age is 67.  If you elect to start taking your Social Security benefits then, you will receive 100% of the calculated benefits that you have earned.

You do have the option to take is as early as 62 or as late as 70.  If you take is early, like a lot of people decide to do, you lose about 7% of your annual benefit for every year early.  And if you decide to delay beyond 67, you get about 8% more in annual benefits for every year you delay, up to 70.  Beyond 70, there are no additional benefits, so it doesn’t really help to delay beyond that.

Here’s the question.  What’s the best age to begin taking Social Security?

Most people approach this in one of two ways.  First way – let’s just take it as early as possible because I want to retire ( and maybe get out of my miserable job.)  That’s okay, but it does leave you with a lot less money for the rest of your life.  Like 2/3 of the annual benefit, for as long as you live.  That’s a big downside.

The other way people commonly think about this is calculating a breakeven point.  So if I wait a couple of years, I don’t get those 2 years of Social Security income (and have to either keep working or live off my own savings), but my payout will be 2×8% = 16% more, every year for the rest of my life.  And this amount will be adjusted upward for inflation each year.  So I have to live approx. 12-14 years more to break even on this “investment”.  So if I think I am going to live beyond 80, I’ll get my money’s worth.  Yup.

However, I think that people forget that the longevity stats for living show the average age for men or women to live, when they are at a certain age.  For example, if you are a 67-year-old man, the average longevity is about 81.  About 14 years.  But what that really means is that half the population will live beyond that and some will live for decades beyond that.

This is where my thinking on Pascal’s wager comes in.  Philosopher Blaise Pascal was considering whether God existed, and if he should believe in God.  He reasoned that if he believed in God, but it turned out that God didn’t exist, his loss was that he could have sinned more without much consequence.  But if he didn’t believe in God, and it turned out God existed, he would live for eternity in Hell and misery.  He chose to believe in God.  The downside was much greater than any upside.

So, my current thinking on Social Security is that we should think about this not from a breakeven point of view, but more from a guarding against long-term bad situations, like living under a bridge eating cat food when I’m really old.

I have been diligent in investing for my life, and my health is reasonably good.  I am fortunate to have these, and I know not everyone can afford to think about Social Security this way.  This leads me to believe that the best option for taking Social Security is to delay until age 70, which provides the highest level of annual benefits, which are also inflation protected.  Almost like self-insuring, self-funding a longevity annuity without all the annoying costs and downsides.  And who can beat a guaranteed 8% annual investment return for every year I wait, that will be inflation adjusted every year in the future.  No one.

On the other hand, if your health is poor, I would go for early Social Security so I could live the fullest live in my remaining years.

It seems like taking Social Security at your full retirement age is not optimal.  You should either take it as early as possible (if you know you will not live long), or delay it as long as possible to ensure against a long life of poverty.

Wow.  That’s kind of a downer conclusion, but I do think it is the best way to think about when to take Social Security.

Thoughts?

Stephen Covey wrote a bestselling book called “The 7 Habits of Highly Effective People”, which shares 7 lessons in Personal Change.  One of my favorites is “Begin with the End in Mind.”  This lesson seems to apply to almost everything in life.  Sometimes I think of this as getting the big things right.

I remember packing my VW at the end of a college semester to go home.  Somehow I got everything to college, but it never seemed to fit coming home.  I always ended up with the mini fridge or bike sitting on the driveway.  And I just wanted to get out of there.  Maybe I was in a rush.

But I found that with practice and by beginning with the big things, somehow everything would fit.  My plans weren’t perfect: just start with the big, heavy things.  The smaller things fit in wherever and I always found a way to get them in, without too much effort.

This is a great metaphor for your financial life.  There are so many people telling you all the details of every conceivable thing.  It seems overwhelming.  Add to that the instant interpretation of the ups and down of the market, most of which is just noise.  But it undermines your confidence and you start to feel like maybe you need help from one of the “experts”.  But just like packing your car coming back from college, you don’t need an “expert” and you don’t need a detailed plan that takes everything into account.  Just Begin with the End in Mind.  Start with the Big Things.

So what are some of the Big Things?   Here’s my list.

Retirement:  This is probably the biggest.  As a millennial, you should count on living to 100.  This means you will need a bunch of money to cover several decades of living without an income.  And nobody will give you a “loan” to cover living expenses when you’re retired.  So get started as soon as possible on this one.

Healthcare:  Most of us don’t have many health problems now, but when they do strike, they wipe people out.  It’s just like hurricanes along the coast.  One may not have hit you yet, but you know it will, and when it does, it’s going to be painful.  Living a healthy lifestyle is great “insurance” and makes life enjoyable for a long time.  And having some decent health insurance keeps catastrophes from wiping you out financially.

Debt:  I’m not against debt, but it has to be reasonable compared to your income, and of the right kind.  The right kind of debt is that which builds up your human capital (your skills, employability, etc.), or is for an appreciating asset (like a reasonable cost home, not a speculative or “stretch” house).  Try to avoid any other kind of debt, and pay it off quickly.  Especially credit cards.

College savings for kids:  If you have kids, then help them get a good education for the smallest price possible.  Saving anything, and considering the state university helps tremendously.  But get started when they are born, even with a small amount.

That’s it.  Everything else is the small stuff.  Keep it in check, but don’t sweat it.

What are your thoughts?