Saturday, March 29, 2014

When to Take Social Security Given Other Types of Retirement Assets Part II

The argument for delaying Social Security is pretty straight forward. If you live past the tipping point you get more money. The actuarial tables tell us an average 66 year old American man has another 16.79 years left on this planet. At age 83 you win big time by delaying. Once you pass full retirement age (for me 66) my Social Security draw will increase by 8% a year until I reach 70.

That is a pretty righteous incentive to wait.

The arguments in favor of an earlier draw are a little more subtle. They start with flexibility, a key component in my “defense in depth” concept of budgeting in retirement.

Defense in Depth (Budgeting in Retirement)

An extra $1,616 a month (at age 62 from yesterday’s example) will provide a lot of additional flexibility. If that money allows me to leave a healthy growing 401(k) untouched by taxes that might prove more profitable in the long run. Living on renewable resources rather than depleting reserves in the early years of retirement will allow the magic of compound interest to continue working in my favor. If your retirement savings are barely adequate, you are taking a big risk to the future health of your 401(k) if you have to withdraw money every month in those early years of retirement. Social Security mitigates that risk.

Who says you have to spend that money? If you invest those funds starting at age 62 at an expected 7% rate of return, the calculator tells me you will have an additional $207,171.04 at age 70. You have essentially self insured for the potential expense of long term care. At age 60, $300,000 in long term care insurance for a couple with minor preexisting conditions might run over $7,000 a year. That could be a deal breaker for retirement at age 62. The odds against requiring nursing home care for long enough to pass the waiting period on your long term care policy prior to age 80 are pretty slim. The $140,000 you spent on premiums in those 20 years are gone forever. If you self insure, you (or your heirs) might get to keep the money.

Jonathan Pond suggests that if your net worth is less than $500,000 you can’t afford long term care insurance; if your net worth is in excess of $1,000,000 you don’t need it; self insure; if your net worth is between $500,000 and $1,000,000, think about it.

For more on the long term care decision:

Long Term Care Insurance

Then there is the quality of life argument. At age 63, my mind is still working (at least most of the time). I can walk 5 miles. There are things I can do in retirement today that I might not be able to do in another 20 years. Money spent on experiences, given my current condition, might be money well spent. If I wait, I may not have the opportunity to fully enjoy the fruits of my labor.

Finally, there is the old “bird in the hand” argument. I try never to make a financial decision on the basis of fear or greed. This can be difficult in our nation’s current financial situation. I am tempted to take the bird in my hand rather than wait to get two birds in that bush over yonder.

For the record: My wife began to draw her Social Security at age 62. Lord willing and the creek don’t rise I plan to wait until full retirement age, in my case that would be 66. Then I will begin to draw my Social Security and my wife will flip her draw to a spousal benefit off my draw which will increase her monthly benefit.

No comments:

Post a Comment