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Independently Financed

The Social Security magic trick

October 17, 2017 by indyfinance 11 Comments

I often say I like writing about money because it’s an area of human activity that naturally lends itself to my unfortunate literal tendency. Today’s post is a good example of what I mean by that.

Everybody knows Social Security retirement benefits rise the longer you delay claiming them

Usually this is framed as an incentive to “delay retirement” or “keep working” past age 62. I’ve even written before about the effects of late-career Social Security contributions. But today I’m not interested in your career plans, I’m interested in your Social Security claiming strategy.

While early retirement benefits are decreased on a month-by-month basis and late retirement benefits are increased on a month-by-month basis, let’s dispense with that calculation and use just three values: claiming as soon as you’re eligible at age 62, claiming at full retirement age (67 for workers born in 1960 or later), and claiming at age 70:

  • at age 62, your benefit is 70% of your full retirement age benefit;
  • at age 67, your benefit is 100% of your full retirement age benefit;
  • at age 70, your benefit is 124% of your full retirement age benefit.

As an aside, no one uses these values because of the 30-year-old fad for panicking over the solvency of Social Security. But defending Social Security is a political choice, not a matter of accounting, so I am using the figures found in current law.

There is one additional nuance that is not especially relevant for reasons that will become clear but I want to mention anyway for the sake of completeness. The dollar amount you will receive at age 70 is not 77% larger than the dollar amount you would have received at age 62, even though 124 is 77% larger than 70: the dollar amount you’ll receive is substantially larger, since your “primary insurance amount” is adjusted for inflation in addition to being adjusted for delaying retirement. Note that this is not the wage-inflation adjustment that’s applied to your earnings in order to calculate your primary insurance amount. It’s a separate, consumer-price adjustment (technically “Consumer Price Index for Urban Wage Earners and Clerical Workers”) applied to your primary insurance amount every year whether or not you are collecting a retirement benefit. If you want way, way too much information about this process see this Bogleheads thread.

Nothing up my sleeves

Ready to be dazzled? Let’s say you plan to have no earned income beginning at age 62, and you need exactly $14,880 in annual income (mechanically scale this amount according to your own needs).

This is, conveniently, your old age benefit if you delay claiming Social Security until age 70 if your primary insurance amount is exactly $1,000 (again, scale according to your own situation). Now, you have three options:

  • Claim your old age benefit of $8,400 at age 62 and supplement it with $6,480 in income from your accumulated savings. Using a 4% “safe withdrawal rate,” you’ll need $162,000 in savings to comfortably retire.
  • Claim your old age benefit of $12,000 at age 67 and supplement it with $2,880 in savings at a 4% safe withdrawal rate, which requires $72,000 in assets at age 67. However, you’ll need to supply 5 years of risk-free, inflation-adjusted income between age 62 and age 67 (remember, you won’t have any earned income after age 62). That will require $74,400 more housed in a nice inflation-adjusted vehicle like Vanguard’s short-term TIPS fund, for total assets at age 62 of $146,400.
  • Claim your old age benefit of $14,880 at age 70. You won’t require any ongoing income supplement from your accumulated assets, but will need to cover $119,040 in expenses for the 8 years between age 62 and age 70.

The longer you wait to start claiming your old age benefit the less savings you need when you stop working.

How’s that for a magic trick?

Filed Under: social security

Reader Interactions

Comments

  1. Lela says

    October 18, 2017 at 12:13 am

    If you die at age 73, you would have been better off to have taken your benefits early. Sometimes, a bird in hand is better than 2 in the bush.
    Also, if you have no income earning potential, other than a fixed amount in investments, taking early retirement can allow that investment money to grow instead of being drained, partially offsetting the increased income should you wait.

    It’s these factors that swung my decision the other way when choosing for my Mother whether she should take early retirement or not.

    Love your ideas though!!!!! And the hard numbers!

    Reply
    • indyfinance says

      October 29, 2017 at 9:51 am

      Lela,

      If you die at age 73 you’ll be dead, so I don’t see how you’d be better off.

      —Indy

      Reply
  2. Aleks says

    October 26, 2017 at 9:37 am

    What is ‘old age benefit’?
    You obviously not using this term equal to SSI: “This is, conveniently, your old age benefit if you delay claiming Social Security…”
    Please explain where one gonna receive payment at 62 if not SSI?

    Reply
    • indyfinance says

      October 29, 2017 at 9:49 am

      Aleks,

      Social Security’s old age benefit is a government pension that Americans receive based on their 35 highest-earning years in the workforce. Americans are first eligible to claim their old age benefit at age 62, and it increases in value the longer they defer claiming it, up to age 70.

      —Indy

      Reply
      • Aleks says

        October 29, 2017 at 2:00 pm

        First, I believe it’s based on 5 highest-earning years.
        Second, your answer is still does not resolve your statement: “This is, conveniently, your old age benefit if you delay claiming Social Security…” – basically it’s saying ‘This would be your SS benefit IF YOU DELAY your SS benefit… So how you gonna be paid if you delay the payments from it?

        Reply
        • indyfinance says

          November 1, 2017 at 10:19 am

          Aleks,

          I do not know what you are talking about.

          —Indy

          Reply
  3. Prashant says

    August 6, 2022 at 6:48 pm

    I think in the first case, using the 4% rule and a market-based portfolio to replace federally guaranteed inflation adjusted income is not fair because it downplays the risk of something going awry. There is a reasonable chance that the retiree lives long enough to spend down the savings completely.

    Reply

Trackbacks

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    November 16, 2017 at 6:44 pm

    […] Security old age benefit, which is why their first priority should be maximizing that benefit by delaying their old age benefit as long as possible, even if it means spending down their retirement savings before […]

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  2. Wrapping my head around variable annuities - Independently Financed says:
    May 12, 2018 at 11:14 am

    […] other words, since delaying filing for Social Security is so lucrative, even someone retiring early should find a way to delay claiming their Social Security old age […]

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