Turning 62: Take the Social Security and Run?

retirement

Not me!

by James A. Bacon

I turn 62 years old today, and one of the few perks of advancing age is the prospect of collecting Social Security. I, like thousands of other Baby Boomers who turn 62 every day, face the decision whether to start pocketing Social Security now, wait until full retirement at 66 or delay taking benefits even longer in the expectation of bigger checks down the road.

The conventional wisdom is that it makes sense to wait to 66, or even older if you can, because each year you delay, your SS benefits increase by roughly 8% to compensate for the actuarial reality that you’ll have one year less to collect before you die. If you’re in good health and expect to live longer than average life expectancy for male 62-year-olds — 83.8 years — delaying retirement is an especially good idea.

But what if you don’t have faith in the system to deliver on its promises, as I do not? What if you share the widely held belief that, barring heroic action by Congress, that the Social Security Trust Fund will run out by 2030? If the trust fund runs dry, the system can pay out no more than it brings in through payroll taxes, or about 75% of current promised levels.? Should we adopt the attitude of take the money and run? Get what’s yours while you can?

It’s a big decision, so I punched some numbers into a spreadsheet to see how the Retire-at-62 scenario compares to the Retire-at-66 scenario. (The numbers below are rough estimates only, not official Social Security Administration estimates.)

SS_payout2
This chart compares the cumulative payout under a Retire-at-66 scenario receiving $2,000 per month or $24,000 per year compared to a Retire-at-62 scenario of $1,500 per month or $18,000 per year.

Waiting until 66 means no Social Security income for the first four years. During that period, you’d end up a cumulative $72,000 in the hole. But then, beginning at 66, your annual payout would be roughly $6,000 per  year higher. You’d whittle away at that $72,000 hole until, at age 77, you broke even. After that, you’d be ahead of the game by increasingly large margins each  year.

Then comes Boomergeddon. Around 2030 — the left vertical line — the trust fund runs out of money and Uncle Sam reduces the payout to what it brings in through payroll taxes, or about 25%. (The actual number would vary, depending upon economic and employment conditions.) In one sense, you’re screwed — you’re getting less than promised. But you’d be screwed if you retired early, too. You’d still be ahead of the game compared to retiring at 62 — just by a smaller margin, ahead by only $4,500 per year instead of $6,000 per year.

If you live until 83.8, your life expectancy at 62 years old today — the right vertical line — you’d still be ahead. If you’re healthier and more long-lived than average and live past 83.8 — and half of all males do — then the cumulative payout surpasses the early retirement scenario by an increasingly large margin.

This calculation does not take into account inflation, but that’s a non-factor because the Social Security program adjusts the payout each year to reflect the higher cost of living. Neither does it take into account the time value of money. A dollar earned in 2015 is much more valuable than one earned in 2030. That’s especially true if you actually save your money and earn a return on your investment. But most people (including me) don’t anticipate saving money during retirement; they anticipate spending down some or all of their savings. They view Social Security payments as income to be spent. Thus, the time value of money really has no application here.

What if, as I argued in my book “Boomergeddon,” Uncle Sam changes the payout in a Boomergeddon scenario to make Social Security even more of an income-redistribution engine than it already is? People living on the margin, say $1,000 a month, live a marginal existence as it is; they would truly suffer if their payments were cut when the trust fund is exhausted. There is a high degree of probability that politicians would give low-income households smaller cuts and take the balance out of the hides of higher-income households. But that still doesn’t change the bottom line that most middle-class Americans would be better off retiring at 66 — they would be better off by a smaller margin. Anyone with a lick of sense would anticipate the possibility of changes to the payout formulas and adjust their lifestyles accordingly, but the prospect of Boomergeddon shouldn’t change the decision when to retire.

The critical variable influencing your retirement-age decision is your health. If you have diabetes, untreated hypertension, a high risk of cancer or other health threats, you have worse odds of making it to 83.8 years old. Even then, you’re not necessarily well advised to take the money and run. The break-even year is 77. If you live older than 77, you’d still come out ahead delaying your retirement.

For many people, the discussion is purely academic. If you’re working a full-time salaried job, it probably makes sense to continue working, generating income and letting your Social Security retirement benefits gain value. But there are plenty of sixty-plus people who have lost their jobs, find themselves working part-time or have fluctuating free-lance incomes for whom that Social Security income might look pretty good. Those would be well advised to think carefully before making the leap.

There are currently no comments highlighted.

18 responses to “Turning 62: Take the Social Security and Run?

  1. congrats ! but your “calculation” is not done yet, read on.

    Also, using words like “run out” and “dry up” don’t really describe the situation – truthfully. It implies a boomergeddon style situation and that’s just not the case.

    It’s also does not go from 100% to 75% overnight.

    next – if we do something SANE about immigration – we’re going to see an influx of more FICA… once they come out of the shadows and employers have to follow the law.

    Finally – the thing I think you missed was having your Social Security Income taxed.

    yes… I know … it sounds like some kind of a liberal plot – but it’s not only true – it was instituted under a GOP POTUS if not mistaken!

    see – you actually put money into Social Security -untaxed and usually when you put something aside untaxed – later when you start using it – it’s taxed – like a lot of 401(k) are.

    With Social Security – they give you a break – unless you have lots of other income – so the moral of the story is – if you are in the situation where your SS can be taxed – will it be less taxed if you wait until later when your income might be reduced?

    and to help you make that decision – I’ve provided a link to a handy-dandy calculator – and please come back and tell us how it turned out!

    How much of my social security benefit may be taxed?

    http://www.calcxml.com/calculators/how-much-of-my-social-security-benefit-may-be-taxed

  2. We need an early retirement asset tax. Anybody who stops working before they turn 65 (or maybe even 70) needs to pay a special tax. The willful non-workers are still defended by our military, protected by our police, etc. Why should they slack on paying income taxes just because they’ve chosen not to work? Especially now that Obama has ignited a massive recover with near full employment getting a job shouldn’t be all that hard.

    The asset tax is pretty easy:

    1. Add up all your assets – house, IRA, 401(k), stocks, retirement accounts, etc.
    2. You owe 3% of you asset base in taxes each year
    3. If you worked and paid taxes greater than the amount calculated in 3. then you are fine, no asset tax payment required.
    4. If you stopped working or worked so little that you didn’t pay 3% of your asset value in taxes then you owe an asset tax payment

    Example:

    1. Net worth: $500,000
    2. Asset tax @3% = $15,000
    3. Actual income taxes paid during the year = $10,000

    You owe a $5,000 asset tax payment.

    It’s time for the rich, fat cat early retirees to start paying their fair share.

    • well.. I’m not in disagreement with Donj’s sentiment but there are some addition things to think on.

      Soldiers and Police get to retire way early – right?

      would you put the same rules on them?

      Next – the biggest group of employees that retire before 65 – by far, are Federal employees – and a huge majority of them are DOD.

      You put your 30 years in – and you get your full retirement.

      and just like with Teachers – they really want you gone because at that point you cost twice as much as a new employee does.

      Next. Some people retire and work in Food Banks or drive the elderly to the medical appointments or do volunteer taxes are work for Habitat for Humanity, etc.

      How about a credit for that?

      there’s one other aspect of “retiring that separates the haves from the have-nots.

      and that’s health insurance. If you “retire” before age 65 – you better have access to health insurance or you are screwed, blued and tattooed.

      this is why – some employers will actually sign off on someone leaving “disabled” because they’ll get Social Security Disability as wells a Medicare.

      our current health care system – totally distorts our economy.

      If you are one of those folks who cannot get on with a company that provides employer-provided for you and your family – you are screwed.

      “retired” people make pretty cheap re-hires but the problem is that retired folks usually don’t put up with bogus employment practices whereas a young and dumb and/or someone desperate for health insurance will do whatever it takes to keep the job. Retirees? They’ll let you know what to do with your bad employer practices.

  3. OK: Even if the Congress does nothing, the Social Security fund will not run out. It is only those who hated, and still do, the concept of caring for the weak, infirm, and old who maintain that position. They have been very consistent at it, but it is still not true.

    Even if Congress does nothing, the fund will be able to pay out at least 75% of the promised benefits. And the fix is so elementary and basic that the Congress will take it.

    So, what’s the problem?

    • the problem is the weasels who get elected saying the won’t touch Social Security but at the same time – fundamentally are opposed to the individual mandate of Social Security and will work to undermine it – including NOT voting to make the simple fixes that would put it back on a sustainable track.

      The folks who rely on Social Security are in denial. They don’t believe the folks on the right would shoot it in the butt if they could – but they will.

      Folks like Paul Ryan – if he had the votes – would kill it.

      the people who run for office – the GOP folks who run for office have the same attitude towards Social Security and Medicare that they do about the MedicAid Expansion in Va. They are opposed to the idea of government programs like Social Security, Medicare and MedicAid and they’d kill them in a New York Minute if they could.

      that’s the “problem”.

      these guys get into office on false pretences. If voters REALLY KNEW what their basic political philosophies really are – they be voted out in a New York Minute.

  4. Interesting calculations, Jim. I retired from my professional job and took SS at 64, in 2004, and the calculations then looked very favorable in doing so. SS allowed me to pay bills while investing in an income-producing farm mit B&B/wedding business that has prospered since. Very good move and investment strategy. Of course, being older, I miss some of the risks you allude to, but the notion that we’ll do without SS in the future is, I believe, most unlikely. In any event, we’re not good at economic or political forecasting more than five years ahead, and we make economic decisions on extraordinarily imperfect bases, such as how poorly we understand “debt” and the responses to it. (see http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0 ).

    In contrast we can forecast long term trends in climate change, with its virtually unanimous scientific agreement, and yet we prefer to ignore these. Jim, maybe you should better consider how a warmer climate affects your retirement plan!

  5. Another federal payout parameter is the IRA minimum annual withdrawal that kicks in at 71. Assuming you benefit most by leaving as much as you can in your tax-free IRA for as long as you can while it sits there and grows, then that is an additional reason to take from SS before 71, especially if and to the extent necessary to delay withdrawing from your IRA. Because you’ll have to take from the IRA after 70.

    I tend to agree with NoVaS that the SS fix overall is too obvious and will get made — the question is, will it have strings (or taxes) attached that further skew the benefit towards take it now, earlier rather than the promise of more later.

  6. Yeah, SS fixes are obvious. We all know what they are. But they’ve been obvious for years, and no one has dared touch them since the Reagan administration. Both parties demagogue the issue. The SS Disability Fund runs out of money next year, and Congress will probably combine it with the Retirement Fund, which kicks the can down the road. Every year we let slip by, the less time the obvious fixes will have to work their magic, and the greater the pain when Congress does act. But the greater the pain, the less the likelihood Congress will ever act.

    I’m not saying that collapse of SS is a foregone conclusion, but I don’t buy the idea that a fix is a foregone conclusion either.

    Anyone who plans their retirement expecting full promised benefits past 2030 is rolling the dice.

    • The GOP is going to continue their tactic of holding the govt hostage to fixing anything – and social security will be no exception.

      The price for fixing Social Security, no doubt, would be the repeal of the ACA or getting rid of food stamps or the MedicAid expansion.

      Some folks here also have short memories about what George Bush proposed with respect to Social Security. He and the GOP wanted to privatize it into a stock market fund, remember? That was just 10 years ago.

      I’m also heard it expressed here that we should take the FICA money and use it in the general fund… since SS was said to be a “ponzi scheme”.

      Then I’ve heard – we can’t fix it because it would encourage more illegal immigration.

      The GOP – at any time – could propose one of the simple fixes already scoped out without any strings attached and the Dems would agree.

      The Dems do not propose it because they know what the GOP would do . They’d use it as another bargaining chip to get rid of some regulation or some other entitlements.

      It would never be allowed to be a simple proposal with a simple vote – put that behind us and move on to the other issues.

      Nothing gets done anymore without a hostage-taking of some kind.

  7. so to answer the question about social security being taxed – it can and it can be a huge tax bite.

    If you were going to get $25K in social security

    and you had 50K in other income – pension or wages or interest, royalties, etc – any income – INCLUDING tax free income or a part time job.

    your social security would be taxed at 85% <—- YEP

    and you'd owe an ADDITIONAL 5K in taxes. <—- OUCH!

    if you only had 25K in other income, your additional tax would be $688.00

    so.. it's pretty important that you time your social security to kick in when your income flow will generally be lower if possible.

    Social Security is TRULY – INSURANCE – it's official name is:
    Old-Age, Survivors, and Disability Insurance (OASDI)

    and little understood by many – it not only guaranteed retirement income, it guaranteed survivor income to your spouse and kids if you died or became disabled. It also provides you with inflation-adjusted benefits – which many annuities do not provide you. Your 401(k) provides you with the same amount of money -every year while your Social Security COLA adjusts every year.

  8. “Anyone who plans their retirement expecting full promised benefits past 2030 is rolling the dice.” Amen. But that applies equally to IRAs and corporate pensions and real estate and mutual funds for that matter. Hell, at some point the only resource that isn’t based on trust of future stability of financial systems generally and retirement benefits specifically is a Gold Brick! And no, I’m not willing to go there.

    Yet.

    • Acbar makes an excellent point. There is a little govt agency called – Pension Benefit Guaranty Corporation – that was created to rescue folks who were promised pensions from their companies – who then reneged.

      The neat thing about this govt agency is this:

      The PBGC is not funded by general tax revenues. Its funds come from four sources:

      Insurance premiums paid by sponsors of defined benefit pension plans;
      Assets held by the pension plans it takes over;
      Recoveries of unfunded pension liabilities from plan sponsors’ bankruptcy estates;[4] and
      Investment income.

      this is yet another example of how the private sector fails, innocent people get harmed – and govt has to step in – and they do it – without a penny of govt money!

      Now – fair to point out – that businesses have railed about the premiums collected to go into the PBGC fund – the same way companies rail about having to put aside capital for risk purposes or companies have to pay into the Superfund or even FDIC.

  9. There’s more irony to the PBGC. It was created by a law called Employee Retirement Income Security Act of 1974 (ERISA) …

    and besides pensions – the law sets rules for employer-provided health insurance .

    Two major rules that were imposed on insurance companies providing employer-provided health insurance were:

    1. – that they could not deny insurance to those with pre-existing conditions (with some exceptions).

    2. – that they could not charge those who bought insurance – different prices based on their individual health status.

    this benefits people with employer-provided insurance with govt guarantees about insurability and price – that people who buy insurance on that good ole free market don’t get that guarantee. That’s in addition to not having to pay taxes on that benefit – not Fed nor State nor FICA – something the folks who buy insurance on the good ole free market have to pay…

    yet the folks who get those benefits – argue against those same benefits being provided to people who don’t have employer-provided health insurance.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/15/the-huge-health-care-subsidy-everyone-is-ignoring/

  10. Sir,

    “I’m not saying that collapse of SS is a foregone conclusion…”

    You argue in Boomergeddon, that the “nightmare scenario of government insolvency” is a “near inevitability” while predicting the “dystopic future” of a “financially hobbled United States” and the “mother of all financial meltdowns” that will turn America into the “United States of Zimbabwe.”

    Sounds like you’re pretty sure that we won’t in the end solve this problem. Sounds to me like you think that in the final analysis the people who make up American society won’t figure out a way to solve this relatively simple problem.

    Sounds like you believe that the Americans who hold our nation’s vast wealth – and it’s more than enough wealth to pay all our national debt and support our aged and infirm besides – will allow the United States of America to completely fall apart as a society before they pay a bit more in taxes.

    Sounds like you think the Koch Brothers, the Waltons, Bill Gates, and the other billionaires will allow the Golden Goose to collapse and become Zimbabwe over ten percent of their total assets.

    Why do you hate America?

    RSS

  11. Down here in the trenches most people take their Social Security when their unemployment runs out. When you turn 60, you are living on borrowed time in more ways than one.

  12. well a quicker path to retirement income is to make a claim for disability which you can get before age 62 – and if you do successfully get it – then
    you’re also eligible for Medicare…

    this is the reason SSD is running out of money. People who are at risk for losing their jobs at 40 and 50 – and their health insurance – try to make the most of their health problems by agreeing to leave if the company will help them certify their “disability”. So then they get the SSD and Medicare and
    can then fill in the rest of income on whatever else they can find – since their health and basic living expenses are covered.

    There are folks on SSD that own their own homes and cars.. who live in upscale subdivisions because of the way that SSD does not consider assets.

    So SSD is pretty much ripe for scamming and there is a significant cottage industry to help guide folks through the rules to have success into getting SSD.

  13. Interestingly, one of the original ideas for SS was to exempt everyone making more than $3000 annually from paying SS taxes or being eligible for benefits. My understanding is that FDR compromised with Congress and agreed upon a $3000 wage ceiling, above which taxes were not paid and earnings received no future benefit credit.

    • It’s changed over the years but if was never envisioned as a soup-to-nuts retirement program for everyone.

      It was always and still is, considered a safety net and the government has encouraged and incentivized people to put aside tax-free money into other retirement accounts.

      But anyone planning on taking Social Security need to not only look at the 62 age but again -also at your other income.

      You don’t want to take Social Security when you have a lot of other income coming in – because it will be taxed and it will be taxed at a full rate like it was regular income.

      and when you get right down to it – the more important thing is Medicare because without Medicare – it don’t really matter how much you have put aside or have in assets if you end up with heavy health care costs – it will devastate your income and assets and could bankrupt you.

      People do not fully appreciate just how important Medicare is to people who have retired – even people who have several hundred thousands dollars in assets – they can all go away if you did not have Medicare.

      so don’t worry about social security “going broke”. Worry about what they will do with Medicare. Few people at age 50 or 60 think about how a medical condition can send them into bankruptcy… Once they get to 70, they usually know the reality because many of their peer friends are experiencing it even if they are not -yet.

      These days – the lucky ones croak in a day or few days and the unlucky ones languish as their finances bleed out …

Leave a Reply