Thanks a lot.

So, she doesn’t precisely need the money, but she’s thinking about taking it anyway because it’s not like she’ll be around much longer. If she’s unable to teach her one-day-a-week class, SS income might replace that too. I would advise against it for my dad, but I told her that her reasoning made sense…

I think you might have calculated the “return” incorrectly. Social Security is basically a lifetime annuity from whenever you start taking it. The later you take it, the higher the monthly payments — but your expected lifetime is constant, so you are receiving the monthly payment over a shorter period. With a life expectancy of, say, 80 years, someone who starts payments at age 66 can expect to get just about 3/4 as many months of payments as someone who starts at age 62.

In other words, the 75% thing mostly just reflects the fact that you’re getting the payments for a much longer period if you start early. The actual “return” (i.e., the excess increase in monthly payments over the amount needed to exactly account for the shorter time one will spend on social security) will approximately the prevailing interest rate on Treasury debt. This is because, by law, the Social Security trust fund can only “invest” in Treasury debt, and so it uses this return to calculate how much payments should be increased for people who delay taking their benefits.

Because the return on Treasury debt is extremely small and too conservative, even for most retirees, it is unlikely to be beneficial to delay taking Social Security. One would do vastly better to take the money early and *invest* it according to an appropriate asset allocation, e.g. 50% stocks, 50% bonds, or even 30%/70% to be extremely conservative. The return on this will much exceed the actual return on Social Security, and with not much added risk.

There is high risk that Congress will change the current eligibility rules for Social Security — to keep that shaky system afloat.

You must factor in that ‘political risk’ !

Means_Testing, higher age eligibility (70 years old to even begin collecting benefits), and reduced benefits… are quite likely some or all the options Congress will enact over the next 10 years.

Note the U.S. Supreme Court has repeatedly ruled that Social Security is merely a tax — and that any benefits are paid solely at the whim of Congress; workers who must pay the 12.4% taxes have NO legally enforceable right to any benefits at all.

You have no legal right to that money, you can’t leave it to your kids/loved-ones if you die, and what you get (if anything) is purely at the discretion of the 535 politicians… who are warming chairs in Congress at any given moment.

Take the money as soon as you can get it — most 62 year old Americans do just that.

Sadly, most people start withdrawing as soon as they are eligible regardless of whether they need to or not. Many… scratch that, MOST of the boomer generation didn’t take advantage of other great retirement planning vehicles or learn about retirement planning in general. Those that are dependent on social security are going to have a pretty paltry retirement. A little education could have gone a long way. A good resource for beginners that want to learn about tax free investing vehicles is http://www.money-and-investing.com/Roth-IRA-Limits.html

Great article, hopefully it will convince a few people to delay benefits!

Cheers,
Odd Lot

The way it has been setup, many people actually depend on Social Security as their retirement fund and it was never set up as such. For someone like myself, a Generation Y’er I am completely not counting on Social Security.

The incentive for the government right now is to stay liquid given that we are quickly approaching the $10 trillion federal debt mark. From the looks of this program, they are making a bet people will hold off long enough where their return is less than if they take it out early based on life expectancy (sort of like an insurance company would do).

Married couples can do best by the lower paid spouse take it early and the higher paid one later. Individuals should rely on their personal life expectancy relative to median which at 66 is 86. Most people should have a good idea of their life span by middle age. The other concern is they may more use for it early when they are healthy enough to travel and spend it.