What do you get when you multiply 1.6 times five?
A much bigger bump in your Social Security income, that’s what.
Earlier this month, the Social Security Administration announced that retirees collecting Social Security checks will see a 1.6% cost of living adjustment going into 2020. Not great, but given that annualized monthly inflation numbers so far this year have been running between 1.5% and 2%, it’s better than a pointy stick in the eye.
That said, you can do way better.
I’m specifically talking here to those of us on the cusp of 62 and eager to tap into Social Security benefits, or those beyond 62 who haven’t taken Social Security yet and are now thinking about doing so.
Don’t do it. Resist the urge. Sit on your hands.
Better yet, work with your hands so that the temporarily missing Social Security check has no negative impact on your financial life.
Here’s the deal (and you probably already know this): Every year you hold off on claiming Social Security, you get a guaranteed 8% increase in the payment you ultimately receive. You cannot find a guaranteed 8% return anywhere in the world today. Why throw that away? I know the common answers: Social Security is going away, so take the money while you can…I could get hit by a bus tomorrow…I need the income.
#1: Social Security is not going away. Totally bogus issue. Roughly 85% of the program is funded by payroll taxes. Unless every job in America ceases to exist, Social Security is not going away. The Social Security trust fund has some financial issues, but outside of partisan bickering on Capitol Hill and high-dollar lobbying efforts, the program is easily repairable.
#2: Chance favors you not dying tomorrow. In fact, if you’ve reached 62, actuarial science says you’ll live into your 80s—all the more reason to hold off on claiming Social Security too soon. (More on the rationale in a moment.)
#3: If you absolutely need the money to survive, then you have no choice. I get that. But if you can hold off and find a job to tide you over (and I mean a job you love, not some grunt existence you begrudge), your financial life will be less stressful in the long run.
See, if you take Social Security now, at 62 or thereabouts, you’re haircutting your monthly paycheck by as much as 25% when compared to what you would earn at full retirement age. In real terms that means the difference between, say, $1,300 a month and $975. And every year after full retirement age, your benefit keeps rising by 8% annually until you hit 70 (at which point, $1,300 would be $1,769).
These are permanent reductions or increases. So the $975 you earn at 62 is the same $975 you’ll receive at age 80—when you will probably wish your check was larger. Moreover, because of that permanency, you could be receiving the bigger check well into your 90s or beyond, dramatically reducing your stress, given that you otherwise would be living on a Social Security payment eroded by 30 years of inflation.
Financial planners and the financial media will tell you to run a breakeven analysis to determine how much money you will receive cumulatively from Social Security over time if you take your money at 62 or some later date. The argument holds that if you’re going to earn more money over time by taking your cash at 62 instead of some other age, then you should take Social Security early.
That is a seriously flawed argument and might be a leading reason 57% of Social Security recipients opt to claim their money at 62. Most people assume they will die earlier and, thus, their calculations show that they’ll earn more money if they claim benefits at 62.
But here’s a question: Why is the cumulative amount of income relevant to this conversation? Your lifestyle isn’t impacted by the cumulative amount of Social Security money you’ll receive over X years in retirement.
Your lifestyle is defined by your monthly income.
Think about a situation in which some wealthy benefactor offers you $50,000 paid in monthly installments over 50 years, starting at age 25…or you can choose to receive $45,000, but the payments will only stretch across the final 10 years of your life?
What do you choose?
Fifty grand over 50 years will give you $83 a month, and honestly that probably won’t mean much in the grand scheme of your working career, when you’re earning thousands of dollars a month already.
If you choose the latter option and take $45,000 over those final 10 years, that’s $375 a month, which can make retirement easier just when financial stress tends to be at its highest.
Cumulatively, you lost $5,000. But so what? Because emotionally you gained greater peace-of-mind at the moment in life it meant something.
Look, retirement isn’t always about the money, but I also know that retirement is clearly about the money, since you have to afford a lifestyle you enjoy. And I’ll argue that we have a better chance of affording that lifestyle by being smarter about how we manage Social Security benefits relative to the nest eggs we’ve accumulated and the work we can perform well into our 60s and 70s.
Honestly, properly arrange even a modest nest egg and pair it with a job you truly enjoy, and you won’t have any reason to claim Social Security until full retirement age or beyond.
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