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When to draw social security

October 10, 2018

Someone close, both in familiarity and age, has asked my thoughts on when to draw social security. That is not an easy question, because the rules with regard to married couples raise some interesting exceptions, especially if they are far apart in age and income. The thinking below applies to single individuals and to those married, but close enough in the relevant aspects that they can ponder the question individually.

Imagine two single women, fairly similar, both 70, neighbors. Perhaps it’s hard to imagine being 70, but if you have read this far, you likely are closer to 70 than to your birth. When you reach 70, you will need money just as you need it now. The first woman, Presta, draws a social security check of $1,000 every month. The second, Patience, draws $1,760. Assuming both are mostly relying on that for income, that $760 difference is substantial. Personally, I could live on $1,760 in most places in the US. Not well, but managing to keep roof over head and victuals in the fridge and a couple of bottles of wine in the cupboard. Social security benefits get bumped up with inflation. That is a feature that will be more important in this coming decade than the last one. So that guaranteed monthly income would indeed provide a measure of future security.

Things are much tougher on $1,000 a month. Is that enough even for rent (or house taxes and maintenance), insurance, utilities, cellphone, internet, transportation, and groceries? Enough to cover your nut? Not for many Americans.

Maybe things aren’t so bad for Presta. Perhaps she has an extra $100K or more stashed away in a savings account. Because the only difference between these two neighbors is that Presta started drawing her social security eight years past, when first she could at the age of 62, while Patience just started drawing hers, at the age of 70, when one’s monthly benefit is maximized. Let’s assume, not entirely realistically, that Presta diligently put aside that $1,000 each month into a savings account, starting at 62, and now has that as a significant cushion from which she can draw.

The question is: who would you prefer to be at 70, Presta or Patience? I would argue Patience. Even though Presta can draw from her additional savings to make up for her meagre income, how much will she feel comfortable drawing? Once you reach 70, you realize you might reach 85. Or 95. And you don’t want to outlive your money. If you’re having to dig into savings each month, you have to make it last. So Presta, if she is wise, will be quite cautious in using that cushion. Patience likely feels more emotionally secure spending as much or more than Presta each month, because she knows her greater income will be there every month, indexed for inflation, no matter how long she lives or how well she invests.

An article at Motley Fool cites research that those who draw social security early don’t regret it. The research (cite) is behind a paywall, so I cannot read it. Many so queried may have had good reason to take benefits early. I discuss some below. And people tend to justify their past decisions regardless. On this, I would be more curious how views change over time. I can well imagine Presta answering one way at 70, and another at 80.

If Patience dies suddenly at 75, one can imagine Presta crowing that she made the better decision, because Patience never really got the benefit of her extra income, and Presta pulled more money out of the system at that point. Except, Patience did benefit. Not knowing when she would die, it provided her peace of mind about the future. Her heirs are the only ones who suffer a financial loss from Patience dying before the theoretical crossover point. Which comes about age 79 as the graph above shows. In contrast, when Presta reaches 80, and her $1,000 each month seems not nearly enough, and her cushion now is much smaller, and her future needs still stretch to an unseen horizon, she might well wish she had been more patient. So might her heirs, as she starts to ask money from them.

Of course, Presta might not have had much choice in the matter. There are some sound reasons to start drawing social security before reaching 70, of which I will mention two. 1) You need the money. You have reached the point where the only alternative to drawing social security is going into debt. The truth is many Americans don’t have much leeway in when to take social security benefits. I don’t mean this post to be a criticism of those who make hard choices. 2) On the basis of your health, you are quite certain you will die before 75. Why wait, when your physicians have read you the writing on the wall?

If those don’t apply, I suggest giving serious thought to a strategy of patience. If you’re in your early 60s, expect an average lifespan, and you face the practical choice between a) pulling money out of IRAs or other savings for a few years, or b) taking social security now, my first thought is that you should deplete your other resources, even drawing them down to quite little, and put off social security benefits. Social security pays you about 8% in increased benefits each year you wait. It is hard to beat that, investing. Impossible, without substantial risk. And there is large advantage to social security over most other retirement vehicles:

Unlike conventional investments, Social Security isn’t affected by stock market changes, provides protection against inflation and is designed to pay out no matter how long you live. Social Security also provides guaranteed, inflation-adjusted income — which can be expensive and difficult to replicate with investments.

Take full advantage of it for its designed purpose.

Let me emphasize that the average 60 year-old already is under medical care. People who have chronic disease and who have had heart attacks and cancers and bouts with other serious diseases often go on to live decades more. When I qualify my advice above to those who “expect a normal lifespan,” I don’t mean someone in the peak of health. If you’re 60, you likely have some medical issue. And still are likely to live another couple of decades. And will need money as long as you do.

The more complex issue for those now nearing retirement is medical care. Traditional Medicare works well. Alas, the Republican Party is intent on destroying it. (As well as slashing social security.) Whether Medicare still will be around in ten years in its current form depends quite a bit on the political winds. Ryan’s subsidized premiums for private health insurance will impoverish those depending on social security. Not to mention requiring everyone to navigate a maze to get medical care. Ask anyone who has HMO insurance what it is like to find a specialist in the program, to get a referral from your primary care physician through the insurance company, all in order to get a first appointment for a problem. I have no practical recommendations there. Except, of course, vote against Republicans every chance you have.

A 62 year-old American woman has an average life expectancy of 23 years. That’s the typical woman, already suffering a variety of ailments. The median net worth of a household headed by someone 62 is $225,000. Which is better than I suspected. The average social security benefit check today is $1,360. That would be a lavish stipend for the typical 23 year-old, who is comfortable sleeping in the rough and whose chief nutritional requirements are cheap beer and dance and calories. It doesn’t seem quite enough for someone who is older, whose joints creak, whose digestion is more finicky, who has to fill out that part of the questionnaire in a doctor’s office, about which medicines she takes.

2 Comments leave one →
  1. October 10, 2018 9:32 am

    Health can be a major factor as can the size of the Social Security benefit. In my case I thought I was in good health when I hit 62 and certainly didn’t need my astronomical Social Security benefit (~180/mo at age 62) to make ends meet. However, when I was diagnosed with relatively advanced leukemia on my 64th birthday things changed. Having a currently incurable cancer gives you a rather different perspective on the future. Consequently I started drawing Social Security at age 64 simply to get some benefit from it should I not make it to 70, when I had planned to start. Incidentally I did save 100% of my benefit until I started Medicare with is automatic premium deduction from my Social Security Benefit. I still save what is left over. However, the paucity of my benefit made the decision moot financially ($235/mo at 64 versus $335/mo at 70). So in my case my health and potential for early death drove the decision, not the magnitude of the benefit. I am rather atypical given the small size of my benefit, which is due to have worked outside the US for most of my working life.

    I would like to see your thoughts on drawing down savings during retirement. Personally I am having trouble with doing that since I am a savings addict.

    • rturpin permalink*
      October 10, 2018 10:18 am

      Excellent question, Todd. I will endeavor to write something on it.

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