Social Security: Show Me the Money!

showmethe money3Should you wait until age 70 to collect social security? Some say yes, I say no. I’ll take the money early.

Generally, the earliest you can collect social security is age 62. However, if you are making more than $15,120 per year, social security will withhold $1 of benefits for every $2 in earnings above the limit. In addition, there is a 25% reduction in benefits for taking them early. Current “full retirement age” is 66. You can also wait until age 70 to start collecting. Social Security provides a “guaranteed” 8% increase per year if you wait to age 70.

So, many financial advisers do a simple calculation and conclude that you should wait to age 70 and get a slightly larger monthly check. I believe they are missing four key factors in analyzing this important decision.

  • COLA.  Social security payments increase each year by a Cost of Living Adjustment (COLA). This amount was 1.7% for 2013 and will be 1.5% in 2014. Historically, COLA has been close to 3%.
  • Time value of money.  If I take the money early and spend it, that means I didn’t need to draw those funds from my investment accounts. Alternatively, I can invest it. Either way, the social security funds have a 5-8% annual return (economic) benefit to me.
  • Potential changes to social security.  The Social Security Disability Insurance Trust Fund will likely be exhausted in 2016. The Social Security retirement program reserves are expected to run out in 2033. One of these days, Congress may actually deal with the problem. Changes could include extending full retirement ages, cutting back on the COLA, means testing to eliminate/reduce payments to those with substantial income/assets or other methods to reduce future benefits.
  • We don’t know when we are going to die.  Social security stops when you die. However, spouses may be able to take over their deceased spouse’s benefits if they exceed their own.

Here’s an example on how this works and why I think it is worthwhile to take the money.  Let’s assume a person reaching full retirement age of 66 could receive $2,500 per month now. Alternatively, they could wait until age 70 and receive $3,400 per month then.  If they take the $2,500 per month at age 66, invest it at 5% and get a COLA adjustment of 3% each year, their monthly benefit when they reach 70 is $2,813.  In addition, they will have accumulated $136,000 in four years. Yes, if they waited four years, the monthly payment would be $587 more.  However, it will take another 24 years (age 94) before the person waiting until 70 will have as large a pot of money (or economic benefit) as the individual starting at age 66.

Secondly, there are going to be changes in social security. If they introduce means testing, many of us will have our social security benefits reduced or eliminated. Let’s take the money now. If they push out the “full retirement age” that could mean fewer years of payments. Furthermore, none of us knows our “eventual age”. Hence, while many of us hope and expect to live beyond age 94, there is no guarantee that we will. When we die, our benefits die as well.

We’ve done the same calculations for people who want to start collecting early, at age 62. Again, this doesn’t apply if you still have earned income above $15,120 per year. Similarly, taking benefits at age 62 instead of age 66 or 70 is likely advantageous. In addition, there are still some very nice strategies that couples can use to maximize their social security benefits and still start early. Of course, everyone’s situation is different and it is possible that delaying social security may, in some cases, be better. Working with sophisticated software programs such as and an experienced financial adviser like DWM can be quite helpful in customizing this analysis for you.

Don’t delay collecting social security. The gravy train may be slowing down soon.