Change Your Mindset About Social Security

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Dear Friends-

One of the most (financially) significant decisions you face as you approach or begin retirement is also one that few people spend any time thinking about: when to start receiving Social Security benefits. That’s unfortunate because the date you choose will impact your income for literally the rest of your life.

The record shows that the majority of retirees begin receiving their monthly Social Security checks when they reach age 62, the earliest date possible. My hunch is, this decision is based on the flimsiest of criteria: “Because I can.”

In many cases, this is a huge mistake.

Think "Investment," Not "Benefit"

Instead of thinking about Social Security as something the government “owes” you, you ought to think of it as an asset, one of several savings components that make up your total retirement nest egg.

Changing your mindset has interesting consequences: you will see Social Security in a more objective light and will start to evaluate it as you would an investment. As a result, instead of emotion driving your decision about when to pull the trigger — “I deserve it!” “I’m going to grab it as soon as I can!” “My spouse is getting Social Security, so I want it, too!” — it will be based on what’s the smartest choice for your particular situation.

This decision is especially important for tomorrow’s retirees, i.e. baby boomers. There have been a lot of nicknames for this generation, my generation: “Rock ‘n Roll Generation,” “Free Love Generation,” “Anti-war Generation,” “Me Generation,” etc., etc.

But as we head into retirement, I think of us as the “401(k) Generation.” Boomers are, after all, the first post-WWII cohort that has largely been told we’re on our own in terms of providing for ourselves after we leave the workforce. In a sense, we’re part of a great and somewhat scary experiment. The responsibility for both saving enough and investing our retirement plan contributions wisely has fallen on our shoulders as more and more employers switch from costly pension plans to “defined contribution” plans.(1)

Most boomers don’t realize what’s about to hit them.

The fact is, the saving part of this equation is actually the easiest part. Investing your money wisely once you are in retirement so that your nest egg will provide the income you will need for as long as you live — an unknown period of time — is going to be much, much tougher.

Regardless of the politics surrounding the future of Social Security (more on that later), you need to think of it in terms of what it really represents from an objective, financial perspective: a government-backed, inflation-adjusted annuity.

There is no investment that compares to Social Security. Think about it: your benefit is backed by the entity considered the safest in the world: the U.S. government. Your income is guaranteed to increase annually so that it keeps pace with inflation. And you will continue to receive benefits until you die; this is one asset you don’t have to worry about exhausting.

Say your Social Security income started out as $1,000/month and increased every year by 3 percent to compensate for inflation. You receive this income for 25 years. If you wanted to duplicate this on your own you could purchase an immediate “life” annuity. It would cost you—sitting down?—roughly $363,500!(2)

That’s the “investment value” of your Social Security benefit. If you had this amount of money sitting in a bank account, I’d like to believe that you would think long and hard about what you did with it.

Time the Start of Social Security Carefully

There are three critical ages that affect your Social Security benefit: 62, your “full” retirement age, and 70.

Your “full” (also known as your “normal”) retirement age is the age at which you are entitled to receive 100 percent of your benefit. Back in the 1980s Congress approved gradually increasing this age from 65 to 67. However, they left the age at which you can receive a reduced benefit at 62. You can delay starting your benefit until you turn 70. At that point you must begin receiving a monthly check.

For everyone born from 1946-1964, i.e. all baby boomers, our “full” retirement age is at least 66.

Any boomer who begins his/her Social Security benefits “early,” i.e. at age 62, will have their monthly check reduced by 25-to-30 percent (the amount depends upon the year in which you were born). This reduction is permanent. Your monthly check doesn’t suddenly increase when you reach your “full” retirement age.

Moreover, few people seem to comprehend that this reduction is magnified the longer you live.

On the flip side, if you delay the onset of benefits, your monthly check is increased by up to 8 percent per year. The impact of this also compounds, or grows, over time.

With the help of Social Security Administration personnel and the agency’s online calculators (, I came up with the following example to illustrate what I mean.

Here are the assumptions about this fictitious first-wave baby boomer we’ll call “Bart::”
Date of birth: 1/2/1946
Current salary: $24,000/year
Annual Cost of Living (inflation) adjustment or COLA: 2.8 percent (2)
Average Wage Index (salary increase) adjustment: 3.7 percent (3)

Bart would like to know how his monthly Social Security check will be affected if he stops working a year from now and begins receiving his benefit at age 62 compared to working until his full retirement age of 66. He’s also curious about what his benefit would be if he waited until age 70 to begin collecting it.

Inputting the information above into the "Benefit Calculators" on the Social Security Web site (and doing some of my own calculations) produced this information (PDF) about the projected size of Bart's monthly check.

The fact is, although Bart might feel pretty smug if he retires at age 62, his benefit that year is nearly 40 percent less than what it would be if he works an additional 4 years. Even accounting for annual cost-of-living adjustments (COLAs) of 2.8 percent from ages 62 though 65, by age 66 Bart’s “early” benefit is 28 percent less than his “full” benefit.

And each successive year this gap gets wider and wider. That’s because the annual COLA is based on the dollar amount of your benefit. The same percentage applied to a lower benefit, results in a smaller increase in terms of dollars and cents. A 2.8 percent increase at age 70 translates into a $21.00 increase in Bart’s monthly benefit if he started at age 62; it results in a $30.00 increase in his “full” benefit.

For every year past your “full” retirement age that you delay starting Social Security, your benefit is guaranteed to increase by 8 percent. There is no investment that offers this.

If Bart worked until age 66 but delayed starting Social Security until age 70, his monthly check would be 32 percent more than what he’d receive at age 66.(5) This is more than double his age 62 benefit.

Ah, but what about those extra years Bart has been collecting his checks? For instance, from age 62 through 65, Bart’s received a total of $32,196 in Social Security income.

To compare the effect of waiting until he turns 66, we can use the “Break Even” calculator on the Social Security Web site. We’re looking for the “crossover point” — the age at which the total amount of benefits Bart has receives by starting later (age 66 in this example), begins to exceed the total benefits he’d get if he started at an earlier age (62).

It takes almost 11 years. The month before Bart turns 76, his “full” retirement benefits start outstripping his “early” retirement benefits.

What if Bart stops working at age 66, but waits 4 additional years to begin Social Security at age 70? In this case, the “crossover” point is roughly 10½ years. In other words, if he delays the onset of Social Security until age 70, Bart will have received more money by age 81 than he would have received in the past 15 years. From that point on, this difference continues to grow.

Money Isn’t Everything

I’m not suggesting that everyone wait until age 70 to begin collecting Social Security! The point is that the date you select carries significant financial ramifications that you need to: 1) be aware of, and 2) weigh carefully.

Obviously, if you need the money this is a no-brainer. Start your benefits immediately. If you are ill or longevity doesn’t run in your genes, it also may make sense to start Social Security benefits sooner rather than later.

I’m talking about folks who have a choice because they have adequate retirement income coming from other sources — a pension, private annuity, investments, etc. — why not postpone Social Security and receive a higher benefit by starting at some point in the future?

On the other hand, if we hit another bear market that lops 20 percent off the value of your portfolio, you should consider pulling the trigger on Social Security sooner; the checks you’ll get will enable you to reduce the withdrawals you take from your portfolio, giving it a better chance to recover when the market turns around.

The timing of your Social Security benefit also affects your spouse. If you take “early” retirement, your spouse’s benefit will also be permanently reduced.

If both you and your spouse work, each can decide separately when to begin Social Security. Maybe it would make sense for one spouse to start at age 62, but for the other spouse to wait and allow his/her benefit to increase.

The key is to recognize that when you stop working and when you begin receiving Social Security are two separate decisions. They don’t have to coincide.

If You’re Only Planning for a 20-Year Retirement, You’re Planning to Run Out of Money

This week the Employee Benefit Research Institute (EBRI), a Washington, DC think tank, came out with its annual look at Americans’ retirement prospects. According to co-author Jack VanDerhei, an EBRI fellow and professor at Temple University, “What scares me is how many people are still focusing on age 85 as their life expectancy and not planning on having resources beyond that.”

According to the American Society of Actuaries, a 65-year-old male today has a 50 percent probability of living to 85; for a woman it’s age 88. By definition this means that half will live longer!

Another interesting/scary finding of this year’s Retirement Confidence Survey concerns workers who have experienced either a freeze or cutback in their employer-provided pension benefit. Logically, you’d think they’d realize that this means they need to step up to the plate and start saving on their own because they’re not going to get as much income as they thought.

“Forty percent have done absolutely nothing,” says VanDerhei. This is even true for those who are age 55 or older, i.e. those closest to retirement.

Fidelity Investments’ latest estimate is that, on average, Americans are saving enough to replace just 58 percent of their pre-retirement income. Are you really looking forward to living on 40 percent less income when you retire?

Politics, Politics

OK, OK. I’ve heard the argument: “I’m going to take Social Security as soon as I can because who knows if it will be there in the future?”

According to the Social Security Administration’s estimate, even when the excess money that’s been accumulating in the “trust fund” for the past 25 years (mainly thanks to higher contributions by baby boomers) runs out, money collected from those in the workforce at that time will generate 75 percent of the money needed to pay benefits to retirees, assuming there is no change in the benefits schedule.

If Congress does alter this, they will take into account the money already paid to those who opted to grab Social Security “as soon as I can.” In other words, the new benefits schedule (if there is one) will adjust for this, just as the current one does.

Frankly, Medicare is in a lot worse shape than Social Security. The wake-up call for this program is just around the corner.

Under Medicare’s current rules, EBRI estimates that a couple aged 65 today will need $300,000 to cover medical costs if they live to age 90.

Wouldn’t it be nice to know you’ve got extra money coming in at that time because you were smart enough to come up with a strategy for optimizing your Social Security benefit?

The decision about when to begin receiving Social Security should not be made casually.

Hope this helps,

1. Contrary to popular belief, pension plans were never that widespread. At their peak, these plans only covered about 30 percent of the private workforce.
2. Assumptions: Inflation runs 3 percent/year; retirement tax bracket is 25 percent; after-tax return on investments is 6.5 percent; income is received for 25 years.
3. This is an average of the Social Security Administration’s projected annual COLA rates for the next 10 years.
4. This is an average of the Social Security Administration’s projected annual increase in wages for the next 10 years.
5. If your full retirement age is 67, your monthly benefit is increased by 124 percent if you wait until age 70 to start Social Security.

If you have a question for Gail Buckner and the Your $ Matters column, send them to:, along with your name and phone number.