(USA topic) The grim psychology of deciding on when to take social security benefits

[Jingthing]

OK, I had a look at my projected social security benefits.

Somewhat surprisingly, not working at all for over a decade did not significantly reduce the projected benefit for me that I looked at about 15 years ago.

Of course those numbers were perhaps not reflecting inflation. Anyway, can't be helped now.

So the big question is about choosing when to START the benefits. Huge consequences.

Take it early which is age 62, or take a higher payout at full retirement age (for me 66 plus), or wait even longer, age 70, for a much higher payout (if you make it!).

As older Americans know, the benefit is greatly reduced if you start early.

I've read the "break even" point for starting early is about age 78. Here is the grim part. That means if you take it early and you die at 78, financially you break even. In other words, for such people, taking it early would turn out to be the financially best choice.

So a big part of a decision to start early is a grim bet against living past approximately 78.

The big risk of course is if you live much longer, you're stuck with the low payout, and in many cases, that would mean serious deprivation and suffering. (Dog food, anyone?)

How do people deal with this decision?

Statistics are one thing but we're all just one person. A statistic of one.

I reckon some people who would be more rational to take it early based on their health and family history, don't do so because it's just too grim and depressing to face up to the reality to bet against yourself that way.

I have a theory about this. I think the s.s. program RELIES on many people foolishly not taking it early that should take it early. In other words, we all do have knowledge to make educated guesses about our personal life expectancy. If people die before taking any benefits, as so many do, of course, that helps finance the program for the living.

There are lots of other factors, of course, such as if you even have a choice about not taking it early, such as enough other earnings and savings.

But the focus here is on the psychology of the LIFE EXPECTANCY aspect.

Comments welcome.

Edited May 16, 2016 by Jingthing

[wpcoe]

I read an article recently (sorry, don't remember where...) which had the standard chart comparing benefits started at age 62 vs benefits starting at age 65 (66?) plus another chart showing the results if one started taking benefits at age 62 and invested it at 4% compounded until age 65/66, and it raised the "break even" point a couple years.

I turn 62 next year, and barring the new President invoking serious changes in Social Security rules before my birthday, I am definitely going to start collecting Social Security. Bird in the hand, and all that.

One thing I'm nervous about is that with the perilous state of Social Security's future funding, they might raise the early retirement age. How would you feel not taking it at 62, but planning to wait a few years and then they raise the early and normal retirement ages? (They already raised the normal retirement date from 65.) Just something for the more paranoid of us to worry about.

[Jingthing]

I think anyone over about 55 now has no worries about s.s. changing retirement ages. Younger than that yes they should probably expect changes.

Edited May 16, 2016 by Jingthing

[GinBoy2]

Maybe I'm naive, but throughout my entire adult life I've heard politicians huff and puff about changing SS, from privatizing to all manner of changes.

Trouble for all of them, including the right wing zealots, is that, even the right wing zealot voters like it!......Brave politician who messes with his employer!

[Jingthing]

Social security won't go away and it won't be privatized. But there will be tweaks, such as raising benefit taking ages. Of course it wasn't meant to be the only pension but most people don't have private pensions these days, so it definitely needs to stay. For people in their 20's and 30's now, obviously less certainty.

Of course, I didn't mean to suggest that guessing your personal life expectancy is ever the only factor in making the timing decision. But I decided to make this topic only about that because the personal stuff, like your employment, other income streams, and savings situation at older ages, and spouse issues are very specific to the individual.

Also, I'm sure many people know there are stiff financial penalties for earning "too much" if you do continue to work if you take early benefits, and no penalty for that if you wait until full retirement age. Who says we don't have some "socialism" in the U.S.?

Edited May 16, 2016 by Jingthing

[tonray]

You could get snuffed by a bus tomorrow...taking mine at 62. Don't care about breakeven...want to enjoy every day I can a bit more. With SS and corp pension (also at 62) in 4 years I can receive about 1.5 times what I currently earn as a teacher.....today was first day of school....and I cannot wait until I have no more of those. if I could live on what I make today...I imagine I will be able to live in 1.5 x that amount without having to kiss Thai school director's you know what.

Early is my vote.

[Jingthing]

OK, I admit this is very off topic, but I find it very funny.

Apparently younger Americans today are never going to WANT to retire.

I've heard that one before!

Yes, I understand more and more people can't ever retire because they can't afford it, but people still get old and most people aren't in types of work they can realistically do forever, even if people are buying.

Indeed, the idea that my friends and I might pack up and move down to a deluxe retirement community in Florida at age 65 sounds extremely unlikely. That dream was sold to earlier generations of workers who often worked one job their whole career, a condo on the beach being their light at the end of a long, often unfulfilling tunnel. Millennials, on the other hand, have prioritized meaningful work above all, turning hobbies into careers and creating their own jobs when they couldn’t find them. Which means, maybe we won’t want to stop working altogether. And while previous generations might have done so out of physical necessity, maybe our bodies won’t need to.

https://features.wearemel.com/golden-years-optional-dd5dfe5232f4#.14e52xjv6

Edited May 16, 2016 by Jingthing

[NeverSure]

I think part of the decision should be "how much" do you get (where are you on the ladder) and another part should be what other savings or income streams you have. If you're fairly low on the ladder it might be smart to wait and get a bigger amount. It is very possible to get such a small amount in SS you couldn't live on it.

I waited until the max age to collect mine because I enjoyed what I was doing and like so many others, actually get bored being retired. I've had to renew some old hobbies and travel more but I couldn't do that if I was broke. Whatever you do, don't go into your 70's broke and struggling. At some point the health and energy and so on wanes and you really couldn't work if you needed to. Also, who would hire you? If a person "needs" the SS to live on and has little else, I'd wait to get the max and work longer.

Cheers.

[Jingthing]

Yes, I understand.

That's more like real life stuff that goes into a complex decision, rather than looking only at the life expectancy aspect only.

Fair enough, because obviously these decisions aren't made in a vacuum.

But you know, you make a lot of assumptions that aren't nearly universal.

For example, imagine how many people at 62 have no realistic employment options and NEED the check, even the small check.

Even with savings which are hopefully there, NOT taking the check means spending down that nest egg much quicker.

So the life expectancy thing is really big in such scenarios.

Edited May 16, 2016 by Jingthing

[Happy Grumpy]

If you need it at 62 take it.

If you don't, don't.

[Jingthing]

I got curious to do a little casual research. I was wondering what percentage of people take the EARLY claim? More than I thought!!!!

The question in turn is: Why do so many retirees go against this seemingly sound advice?

And the answer is: The decision to take Social Security is frequently less of an option than many experts tend to assume.

Why do people claim early: fact vs. fiction
The problem with much of the available advice on Social Security is it presupposes that prospective beneficiaries have a choice -- that they're willing and able to analyze the decision of when to apply in a cool and calculated manner.

However, new data released by the government offer compelling evidence that this belief is misguided.

http://www.fool.com/retirement/general/2014/06/07/social-security-what-percent-of-americans-claim-be.aspx

Edited May 16, 2016 by Jingthing

[NeverSure]

I never looked at life expectancy because I like facts not guesses or assumptions. If I die early and don't collect as much I'm dead so who cares? If I live a long time only then does it matter.

The facts are that if I waited until full retirement I got more monthly income forever however long that might be. I retired at 65 because my work made that a good thing, and then waited to collect SS.

I don't think there is a right answer for everyone other than to be sure we don't reach 75 or older and not have enough money to live on. That's happened to a lot of people.

Cheers.

[Boon Mee]

On topic is another aspect of SS not mentioned thus far. If your wife is not a US Citizen or Naturalized Citizen and you die overseas e.g. Thailand for example, she is not eligible for your 1/2 of the benefit

That's not the case if you both live in the US and she's a Green Card holder. You snuff it there, she collects 1/2 even not being a naturalized citizen.

To echo an earlier comment - if you need it at age 62, take it then but this poster would definitely take it at full retirement age vs. holding off for a bigger payout.

[ubonjoe]

I started mine at 62. I looked at all the numbers provided when I checked what I would get at different ages. Decided on 62 because the additional income would make my life that much better for those 3 or 4 years it would offset any loss.

[CaptHaddock]

JT,

The break-even analysis is not the way to analyze the decision on when to take SS benefits. A break-even is used to analyze investments, but SS is not an investment. It is insurance. Even the SSA terminology reflects its insurance aspect since your benefits are called the Primary Insurance Amount. No one uses a break-even analysis to decide about insurance. For instance, you don't hear anyone say, "All those years of paying fire insurance premiums on the house and it's too bad I never even had a little kitchen fire to get even."

An investment decision is about getting the best return for your money. An insurance decision is about paying someone else to take a financial risk that you cannot afford to assume yourself. So, we buy fire insurance on the house since its loss would likely ruin us financially, but laptop insurance is a mug's game since all of us can survive the financial consequences of losing a computer. With SS people get confused on many points not least of which is the fact the potentially disastrous outcome against which they need to protect themselves is a long life, which is generally considered a good thing, even though it is potentially a financial disaster.

So, figuring how long you have to live to recover the lost income from delaying is a game for the financially illiterate. The real issue is how to avoid hitting the trifecta: old, sick, and broke. The answer to that is an annuity, guaranteed for life. The best annuity in the world is Social Security, even for a single person, since it is substantially, even if not fully, protected against inflation. The only way to buy more SS is with Delayed Retirement Credits, which are, in fact, huge. If you claim at 62, you get 75% of your PIA, but if you wait until 70 you get 132%, not counting Cost of Living Adjustments.

So, the short answer is: if you cannot afford to delay then you have to take benefits at 62. If you can afford to fund your living without SS, then you should wait until age 70 or until you definitely need the money.

The long answer involves running simulations using financial planning software of which the best consumer product is Esplanner from esplanner.com. This is a very thorough program that accounts for return on investments, taxes (state and federal), home ownership, inflation, relocation, real estate, changes in living standard, marital status, and many more variables. Before I retired I ran over a hundred simulations covering the move to Thailand, taking SS at various ages, etc. Delaying SS always resulted in a higher standard of living for my family under assumptions that seemed reasonable to me for inflation, investment return, etc.

What those who can't get past the misguided break-even analysis fail to take into account, is that, to the extent that SS itself is not sufficient, you have to reduce consumption now to save more to fund your very old age, until age 95, let's say. Funding an extra ten or twenty years of life would be an enormous cost. By earning DRCs with SS I reduce my need to save now freeing up more assets for current consumption. From this point of view even if I were to die early the decision to delay SS would have given me the palpable benefit of being able to spend more immediately. But the real point is that being dead is cheap. I don't have to provide against financial outcomes at that point. It would be very foolish to decide to assume more financial risk myself just to be sure the govt didn't get to keep any of my money.

[Jingthing]

I think it's daft not to at least consider your personal life expectancy based on objective facts you can know such as your own health history and when your parents and grandparents died. Sure it's not an exact science but it's strong evidence. I can see that just needing the income now drives the most popular choice to start at 62. Yes many regret it later. That's a warning to consider the choice carefully. I have found that more women start early than men. That's interesting because women have a longer life expectancy than men.

[Jingthing]

Touching a bit on the psychology alluded to in the headline, it seems to me that people who take it at 62 (as revealed here, usually out of perceived and likely real NEED for that money NOW) and later regret that decision because their money is running out sooner than their life (yes, that's the big disaster people are worried about) might just get depressed and lose the motivation to live much longer anyway. Also of course as anyone can learn from statistics, in general poverty often translates as shortened life expectancy.

[Langsuan Man]

It is a personal decision depending upon whether or not you have other retirement income but whatever you do Medicare part B should factor into your decision

In my case, when they changed the law * for my year group to obtain full retirement benefits (not the maximum benefits but the full amount with no penalty) at age 66 instead of age 65, they did not change the minimum age for Medicare part B, it stayed at 65

Delay it for one year and it will cost you 10% more. (and 10% more for every year you delay it) In addition, since I was not collecting SS, I had to pay my medicare part B premiums from my own funds for that transition year and of could not pay monthly but had to pay quarterly. Once I started collecting then they would deduct it from my monthly benefits

*

source: https://www.ssa.gov/planners/retire/retirechart.html

[Jingthing]

The trend is for the penalty to take it early to be more severe for younger Americans.

I think for my age group that larger hit is already in effect.

As far as my research on when people start benefits:

Most do take it as early as possible, age 62. Big mistake or not, and for many it will turn out to be a huge mistake, that's what's happening.

It's easy to judge people who do that as financially illiterate, but isn't that a very rude judgement from an elitist perspective from people who don't NEED that income at 62? I think it is.

Second most popular is to take it at "full" retirement age ... which varies depending on your age. Typically, 65 or 66 and going up for younger Americans.

The LEAST popular is to WAIT until the highest payout, age 70. I read LESS than 10 percent.

That's kind of interesting. So why is that so unpopular? More people need the money by 65 or 66 or more people do their life expectancy estimates and decide to go for it as the higher payout will be for fewer years. Also, grim time, clearly many people who planned to wait for the "fat" check just happen to die before age 70. Oh well!

There is NO DOUBT at all from a pure investment perspective waiting until the "fat" checks at age 70 makes the most sense by far. That's an incredibly high rate of GUARANTEED return you're not going to find elsewhere.

BUT ... there is more to the decision than that.

Such as will you ever see penny one from that ...

Edited May 17, 2016 by Jingthing

[lovelomsak]

Take it at 62. If you do not need it invest it. What you invest take out in the future to off set costs as they rise.Do not know American tax laws. But in Canada can invest in rrsp's and get a tax deduction for what you invest every year in rrsp. If there is something similar in US do that. at 62 take pension. Put money in rrsp and wait to use it,

Or invest and pay taxs on interest everything till you need it and can withdraw with no tax burden when you use it.

If you invested it all from 62 to 70 You would probably beat what waiting would give you plus keep your taxs down.

Edited May 17, 2016 by lovelomsak

[CaptHaddock]

The trend is for the penalty to take it early to be more severe for younger Americans.

I think for my age group that larger hit is already in effect.

As far as my research on when people start benefits:

Most do take it as early as possible, age 62. Big mistake or not, and for many it will turn out to be a huge mistake, that's what's happening.

It's easy to judge people who do that as financially illiterate, but isn't that a very rude judgement from an elitist perspective from people who don't NEED that income at 62? I think it is.

Second most popular is to take it at "full" retirement age ... which varies depending on your age. Typically, 65 or 66 and going up for younger Americans.

The LEAST popular is to WAIT until the highest payout, age 70. I read LESS than 10 percent.

That's kind of interesting. So why is that so unpopular? More people need the money by 65 or 66 or more people do their life expectancy estimates and decide to go for it as the higher payout will be for fewer years. Also, grim time, clearly many people who planned to wait for the "fat" check just happen to die before age 70. Oh well!

There is NO DOUBT at all from a pure investment perspective waiting until the "fat" checks at age 70 makes the most sense by far. That's an incredibly high rate of GUARANTEED return you're not going to find elsewhere.

BUT ... there is more to the decision than that.

Such as will you ever see penny one from that ...

I'm a little disappointed in your weak reading skills here, JT. As should be clear from my post, I do not criticize those who take SS benefits at 62 because they lack the resources to delay. Those people, who include some near and dear to me, have no choice to make. This discussion is therefore solely directed at those who do have the wherewithal to delay their SS benefits. I wouldn't have thought it was necessary to point this out.

Although I myself am quite willing to insult people even rudely, I have never insulted anyone here or elsewhere simply because he did not have more money. Perhaps you are confusing me with Naam?

The financially illiterate are those who persist in using a break-even analysis where it is not applicable. Even after the difference is explained to them. Especially if they make no apparent effort to understand. Even after they have asked for advice.

Most retirees do take SS benefits at 62. It's likely that most of them have no alternative, but even among those who do, probably the majority take it at the first opportunity. The reason is the same reason that most retirees under private, corporate pension systems will take a lump sum settlement at the time they retire in preference to the life annuity. (The corporations understand this very well which is why all such lump sum offers of which I have heard details are a bad bargain, a fact which is evident because the lump sum is never sufficient to buy a private life annuity with an equivalent benefit.) Most people are not good at delaying gratification. Economists have a name for this particular conundrum. They call it the "annuity paradox." Many of the same folks who decry the disappearance of corporate pensions in America refuse themselves to purchase life annuities, of which SS benefits are the highest quality example.

[Jingthing]

Personally I will probably be one of those with little choice but to take it at 62. I could spend down and wait until 66 (not 70) but the spend down would be major and harm me if I live very long. Either way I'm screwed if I live too long. So picking my poison either way. So which is worse? I really think I prefer not trashing the nest egg.

Could be worse. Forced to go low at 62 and no nest egg.

What besides dying of poverty happens to elders who run out of money? Nobody could realistically live on the age 62 check I expect if that's all they had. Especially if they didn't a home cleat. Not saying the figure but I read it's a typical age 62 check these days.

Edited May 17, 2016 by Jingthing

[GinBoy2]

I'm banking on leaching on my kids!

One of them will take care of me...The other, she'd leave me sleeping under a freeway underpass

[CaptHaddock]

Personally I will probably be one of those with little choice but to take it at 62. I could spend down and wait until 66 (not 70) but the spend down would be major and harm me if I live very long. Either way I'm screwed if I live too long. So picking my poison either way. So which is worse? I really think I prefer not trashing the nest egg.

Could be worse. Forced to go low at 62 and no nest egg.

What besides dying of poverty happens to elders who run out of money? Nobody could realistically live on the age 62 check I expect if that's all they had. Especially if they didn't a home cleat. Not saying the figure but I read it's a typical age 62 check these days.

You will want to pick a blue state with a generous Medicaid program until Medicare eligibility at 65. You are already aware of the importance of a low cost of living. Perhaps you can consider some form of group living arrangement, some version of the 60's communes. Most Americans find a way to survive on SS alone. My 94 year old father lives in a one-bedroom apartment in senior housing in a very nice, upscale town in MA that charges 25% of income, not considering assets, including utilities and gets adjusted down if actual healthcare expenses are above some threshhold. He has savings, but his monthly nut is less than SS because of the low rent. Bus service is free. He can afford to live forever on just his SS.

I think I read that the average SS payout is about $1200/month. So, for the early starters that would be about $900.

I can understand wanting to hang onto a nest egg, although I myself would probably take the long view.

[Jingthing]

I am aware of such low cost group senior housing projects where they charge a percentage of income, no matter how low. Usually there are waiting lists that take YEARS but it's certainly good that there are such options but I doubt there are enough spaces in such places for everyone that might need them.

[CaptHaddock]

I am aware of such low cost group senior housing projects where they charge a percentage of income, no matter how low. Usually there are waiting lists that take YEARS but it's certainly good that there are such options but I doubt there are enough spaces in such places for everyone that might need them.

You don't need to solve the parking problem; you just need to park your car. In my father's town the waiting list for town residents is less than a year for town residents. He was a resident of a neighboring town. So, he rented a room in someone's house in the target town, established that address as his legal residence, and got on the waiting list as a town resident. Within the year he moved in. He has been there for six years.

For a guy with a problem to solve you seem very resistant to actual solutions. If you want to assume that you are already doomed, then fine you're doomed. That approach seem optimal to you?

If I were you I would be asking me the obvious question.

[NancyL]

Based on what I've seen in helping elderly expats with medical problems here in Chiang Mai, I'd agree that the reason most people start to draw their SS at age 62 is because they don't have another option for income. Once I attended a teleconference conducted by the Manila SS office for those of us who assist Americans in Thailand. The gal in the SS office explained SS was never intended to be the sole source of someone's retirement income. Instead, she said, someone should think of their retirement income as a "three legged stool", with one leg being a private pension (i.e. company or union) another leg being personal savings and the third leg being SS. She stopped short of saying this, but it's been my observation that Thailand (and probably the U.S.) is full of retirees trying to live their retirement while balancing on a one-legged stool.

The financial return for waiting is very good -- what is it, something like an increase of 7.5% per year in your monthly benefit? (I know someone will help me out here) Our 401K plans aren't giving us that kind of return. Since we don't have kids or anyone we want to inherit, it makes sense to draw down our personal savings somewhat and let the monthly SS benefit increase. But not everyone has that option.

[Jingthing]

Most people don't have private pensions these days. That SS lady was living in a fantasy past. Sure many people have pensions such as government workers but they're a minority. It's irrelevant how SS was designed. In reality it's vital for so many. Typically most people have SS, no other pension, and hopefully other savings like IRAs and owned housing. So many only have the SS and that's grim.

[Jingthing]

I am aware of such low cost group senior housing projects where they charge a percentage of income, no matter how low. Usually there are waiting lists that take YEARS but it's certainly good that there are such options but I doubt there are enough spaces in such places for everyone that might need them.

You don't need to solve the parking problem; you just need to park your car. In my father's town the waiting list for town residents is less than a year for town residents. He was a resident of a neighboring town. So, he rented a room in someone's house in the target town, established that address as his legal residence, and got on the waiting list as a town resident. Within the year he moved in. He has been there for six years.

For a guy with a problem to solve you seem very resistant to actual solutions. If you want to assume that you are already doomed, then fine you're doomed. That approach seem optimal to you?

If I were you I would be asking me the obvious question.

Oh boy. A man with all the answers. What is the obvious question? I know an old lady considering two places and both have year's long lists. Obviously I don't know the situation at all such places.

[Gary A]

Deciding when to start your Social Security isn't that difficult of a question. You simply take it when you desperately need the money. We certainly have no idea when we are going to drop dead. I was able to get along until I was old enough to get the maximum. I have no idea if I made the right decision but the extra money from waiting is great to have. I now have more discretionary spending cash than at anytime before in my life.