Why I Will Start Social Security At Age 62 Aug. 26, 2014 9:01 AM ET | 777 comments | Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...) Summary •When should I start Social Security? •How will I receive the highest annual income? •How will I receive the highest cumulative income? •When will I be able to retire? Every year, more than 2 million people turn 62. Many of those people will wonder, When should I start receiving Social Security benefits? The earliest age of eligibility is 62. The benefit increases each year you delay starting, until age 70, after which point there is no additional increase. When should I start - age 62 or age 70? Anyone can go to the Social Security web site and get an estimate for their benefit, based on when they start. I did that. Im 58. I learned that if I start at age 62, I would receive $1965 per month, or $23,580 per year; if I start at age 70, I would receive $3486 per month, or $41,832 per year. What is the benefit growth rate? From January 2000 to January 2014, the simple arithmetic average cost of living adjustment (COLA) was 2.47%. Year Increase 2000 2.5 2001 3.5 2002 2.6 2003 1.4 2004 2.1 2005 2.7 2006 4.1 2007 3.3 2008 2.3 2009 5.8 2010 0 2011 0 2012 3.6 2013 1.7 2014 1.5 total 37.1 average 2.473333333 Simple arithmetic average of most recent 15 COLAs Assuming the benefit growth rate continues at the same pace, here is a chart of what I can expect to receive. •Column 1 is the age at the beginning of a 12-month period. •Column 2 is the benefit received during that 12-month period, starting from age 62. •Column 3 is the cumulative benefit starting from age 62. •Column 4 is the benefit received during that 12-month period, starting from age 70. •Column 5 is the cumulative benefit starting from age 70. Age Age 62 Income Age 62 Cumulative Income Age 70 Income Age 70 Cumulative Income 62 $23,580.00 $23,580.00 $0.00 $0.00 63 $24,162.43 $47,742.43 $0.00 $0.00 64 $24,759.24 $72,501.66 $0.00 $0.00 65 $25,370.79 $97,872.46 $0.00 $0.00 66 $25,997.45 $123,869.90 $0.00 $0.00 67 $26,639.59 $150,509.49 $0.00 $0.00 68 $27,297.58 $177,807.08 $0.00 $0.00 69 $27,971.83 $205,778.91 $0.00 $0.00 70 $28,662.74 $234,441.65 $41,832.00 $41,832.00 71 $29,370.71 $263,812.36 $42,865.25 $84,697.25 72 $30,096.17 $293,908.52 $43,924.02 $128,621.27 73 $30,839.54 $324,748.06 $45,008.95 $173,630.22 74 $31,601.28 $356,349.34 $46,120.67 $219,750.88 75 $32,381.83 $388,731.17 $47,259.85 $267,010.73 76 $33,181.66 $421,912.83 $48,427.17 $315,437.90 77 $34,001.25 $455,914.08 $49,623.32 $365,061.21 78 $34,841.08 $490,755.15 $50,849.01 $415,910.22 79 $35,701.65 $526,456.81 $52,104.98 $468,015.21 80 $36,583.48 $563,040.29 $53,391.98 $521,407.18 81 $37,487.10 $600,527.39 $54,710.76 $576,117.94 82 $38,413.03 $638,940.41 $56,062.11 $632,180.05 83 $39,361.83 $678,302.24 $57,446.85 $689,626.90 84 $40,334.07 $718,636.31 $58,865.78 $748,492.68 85 $41,330.32 $759,966.62 $60,319.77 $808,812.45 86 $42,351.18 $802,317.80 $61,809.67 $870,622.12 87 $43,397.25 $845,715.05 $63,336.37 $933,958.49 88 $44,469.16 $890,184.21 $64,900.77 $998,859.26 89 $45,567.55 $935,751.76 $66,503.82 $1,065,363.09 90 $46,693.07 $982,444.83 $68,146.47 $1,133,509.55 Comparison between starting at age 62 and starting at age 70 There are arguments in favor of starting at age 62: •It is unclear when the Social Security Trust Fund will be insufficient to pay out all mandated benefits. •It is unclear if Social Security benefits will be means-tested. •I would receive a total of $205,778.91 before I reach age 70, that I could consume or invest. •If you believe you might die before age 83, the cumulative benefit will be greater. There are arguments in favor of starting at age 70: •The annual benefit will be higher at every age from 70 on up. •If you believe you might die after age 83, the cumulative benefit will be greater. There are probably additional arguments on both sides, but I will stop here, because I believe the start at age 62 or start at age 70 question is the wrong question for me to ask. I believe the better question for me to ask is, How many different ways are there to provide a stream of income that starts at age 62, pays $23,580 in the first year, and grows by 2.47% every subsequent year? One alternative is to start Social Security at age 62. Another alternative is to have a portfolio of dividend growth companies with $23,580 in dividend income and 2.47% in dividend growth. There are certainly other alternatives, but Im choosing to limit my alternatives to these two. You are free to choose other alternatives. Here is a chart showing various combinations of market value and current yield, all of which generate $23,580 in dividend income: Market Value Current Yield Dividend Income $4,716,000.00 0.5 $23,580.00 $2,358,000.00 1 $23,580.00 $1,572,000.00 1.5 $23,580.00 $1,179,000.00 2 $23,580.00 $943,200.00 2.5 $23,580.00 $786,000.00 3 $23,580.00 $673,714.29 3.5 $23,580.00 $589,500.00 4 $23,580.00 $524,000.00 4.5 $23,580.00 $471,600.00 5 $23,580.00 $428,727.27 5.5 $23,580.00 $393,000.00 6 $23,580.00 $362,769.23 6.5 $23,580.00 $336,857.14 7 $23,580.00 $314,400.00 7.5 $23,580.00 $294,750.00 8 $23,580.00 $277,411.76 8.5 $23,580.00 $262,000.00 9 $23,580.00 $248,210.53 9.5 $23,580.00 $235,800.00 10 $23,580.00 How to produce $23,580 in dividend income Suppose I decide to retire as soon as my passive income is $50,000 per year. (Thats not my actual personal goal, its just a number for this example.) Suppose I am able to invest in a portfolio of dividend growth companies whose current yield is 4%. (My actual current yield is 4.26%.) I could retire when my portfolio has a market value of $1,250,000. Or I could retire at age 62 with a combination of $23,580 from Social Security and $26,420 in dividend income from my portfolio whose market value is $660,500. Mathematically, the $23,580 from Social Security is equivalent to the dividend income from a portfolio whose market value is $589,500. Instead of retiring when my portfolios market value reaches $1,250,000, I could retire when my portfolios market value reaches $660,500, which is 47% less. The less I need, the less time I need to wait. The less I need, the less risk I need to take. The less I need, the less yield I need to chase. Conclusion In investing, as in life, the trick is to ask the right question. For some investors, the right question might be, Which alternative produces the highest cumulative income?. For other investors, the right question might be, Which alternative produces the highest annual income? For me, the right question is, Which alternative allows me to retire sooner? LATEST ARTICLES ON YOUR INTERESTS: Market Intelligence For MLP Investors EMES • Today, 1:12 AM • MLPData • 1 Comment Natural Gas: Will The Haynesville Resurrect? APC • Yesterday, 11:57 AM • Richard Zeits • 7 Comments This MLP Fund Is Trading At Close To Its Widest Discount Since Inception, Offering An Attractive Opportunity CEM • Fri, Aug. 29, 9:42 PM • Value and Income Insights • 14 Comments How Much Is Cliffs Natural Resources Worth? A Business Owners Perspective CLF • Fri, Aug. 29, 1:19 PM • Siming Ma • 14 Comments Where Are The Opportunities In U.S. Health Care? 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About this article Emailed to: 407,503 people who get Dividends & Income daily. Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor » Tagged: Dividends & Income, Retirement Problem with this article? Please tell us. Disagree with this article? Submit your own. Articles that link to this one 1. Social Security At 70: Always A Bad Idea by ColoradoWealthManagementFund More articles by Robert Allan Schwartz » How Long Can High Dividend Growth Last? Fri, Jul 25 Does Higher Dividend Growth Lead To Higher Dividend Income? Tue, Jul 22 Is Holding Cash A Good Idea? Will It Pay Off? Fri, Jan 17 On Comparing Earnings Growth And Dividend Growth, Part 2 Fri, Jul 26 Comments (777) Track new comments bd4uandu Comments (1800) | + Follow | Send Message You make an interesting case. Thanks for the numbers. 26 Aug, 09:14 AMReply ! Report Abuse Like 35 Robert Allan Schwartz , contributor Comments (13039) | + Follow | Send Message Author’s reply » Thank you, bd4uandu! Robert 26 Aug, 10:36 AMReply ! Report Abuse Like 3 4stripes Comments (6) | + Follow | Send Message Guess you are not married. Gets more complicated when you consider survivor benefits and the ability to draw half your spouses benefit. You also dont mention the tax implications on early benefits and/or lost income and or health insurance if you retire before 65. No doubt its a tough decision and many ways to look at SS. You are getting a 8% increase in benefits each year you wait and some would equate that to a 8% tax deferred gain by waiting. Having the money early is seductive and tempting with many reasons and assumptions about the future to justify the decision to go early. 26 Aug, 11:59 AMReply ! Report Abuse Like 19 Robert Allan Schwartz , contributor Comments (13039) | + Follow | Send Message Author’s reply » 4stripes, you are correct, I am not married. Yes, youre right, it gets much more complicated. I deliberately avoided all discussions of taxes in this article. Yes, I get an 8% raise for each year I wait, but if I have to work 8 more years, or if I have to use up my own capital during those 8 more years, then it is not as simple a raise as it looks. Thanks for commenting, Robert 26 Aug, 12:07 PMReply ! Report Abuse Like 21 AuCoaster Comments (466) | + Follow | Send Message Robert, If you earn less than 8% on your investments then waiting is probably a good decision. If you can borrow for less than 8% then waiting is probably a good decision... (subject to longevity risk) If you earn more than 8% on your investments, then the decision is pretty clear: take the money as soon as you are eligible, and invest it (or reduce your withdrawal of existing investments). 26 Aug, 01:38 PMReply ! Report Abuse Like 9 Dividend Growth Investor , contributor Comments (610) | + Follow | Send Message Actually this is a pretty good article. Essentially, by taking SS early, you are not fore-going 8% annual increases, but much lower annual increases ( due to the COLA adjusstments). This is something that I have not seen written out anywhere else before. At the end of the day, the decision to take SS early, at 66/67 or late depends on many factors. It is a highly personal choice. I for example expect to move small portions of regular IRA or 401K money into Roth IRA, without triggering any tax liabilities. Therefore, if I havent done that by age of 62, I would postpone taking SS benefits for as long as possible. Of course, if I had already done this, I would much rather spend SS first than spend my dividend income. When I die, the SS benefit is mostly lost out to whoever inherits my money ( family, charity etc). But the dividend checks would likely be there after I am gone, paying for whatever they need to pay for. 26 Aug, 01:45 PMReply ! Report Abuse Like 17 4oclockguy Comment (1) | + Follow | Send Message Ive been at this investment business for over 25 years and it has been interesting to find the snowball effect of social security planning for the past few years. Now every investment firm wants to help the baby boomers in SS planning. My premise simple: No free lunch and the lunch someone has paid for has no guarantees. Each client must choose his own demise. Anyone who has dealt with a mid-fifties couple knows that they have trouble with facts, probability, and mortality. I have a masters in mathematics and I taught high school math for 11 years, so I think I can pretty much use numbers that make sense. But there is such a jumbled roar of opinions from hosts of TV who sell advertising time, magazines that sell investment ads, infomercials that sell books, cds, and videos so you can do it yourself, and Dave and Susie, that I find the use of mathematics is primarily a tool to back up the professional who gets threatened with a law suit. Who will argue with the certainty?? of an efficient frontier risk appropriate portfolio that uses dollar-cost-averaging a $1,000/month investment for 8 years compared with the certainty?? of social security payments after age 70? The government has ignored life expectancy, medical advances, inflation, and behavior modification that has effectively eroded any confidence in what they say about social security continuing. Perhaps it was a Ponzi scheme all along. Insurance companies that depend on interest and income investments are jumping out of the guaranteed retirement income ballgame as the prolonged low interest rates continue on and on. How can an actuary calculate probability if there isnt a dependable basis for the calculation. So thanks for the numbers. Should we party tonight for tomorrow we die? What is worse: running out of money before dying or dying without using my fair share of SS? I just ran a scenario for a single woman whose FRA is $800 an she has an IRA. I think she should spend $40K and wait until age 70 and get $1,066 (with COL). The $40k cant be invested with certainty to earn 8%. But she could live a lot longer than 83. But thats numbers talking. I dont think her fear of losing $40K will allow her to spend it. Taxes are an issue. Limited earnings pre-FRA is an issue. Market performance is an issue. SS trust fund (oxymoron??) is an issue. Spousal benefits is an issue. Working past age 70 is an issue. Health care, nursing home expense, leaving a legacy, should every kid get the same percentage, what about an irrevocable trust? ... on and on it goes. We are left in the unenviable role of a financial advisor that is expected to explain the choices. (I sometimes wonder if I can call myself an advisor if the client doesnt take my advice.) The numbers are part of it. The clients unique outlook on their life expectancy their lifestyle, community, goals, attitude, and family relationship will also play a part. So thanks for putting the numbers together to stimulate this discussion. My bias is that I turn 70 next month and begin taking my own social security after taking half of my spouses benefit for 4 years -- another approach that wasnt considered. Now Im going to smell the wonderful aroma of my 4 oclocks. 26 Aug, 01:46 PMReply ! Report Abuse Like 23 cross Comments (879) | + Follow | Send Message AuCoaster, you are comparing apples and oranges in describing the eight percent increase in benefits (only between the ages of sixty-six and seventy by the way), as monies you are earning. You are suggesting that this eight percent is somehow a return on your investment (NYSE:ROI), your investment being the total amount contributed over the years by both you and your employer. The true ROI, if I remember correctly, is @ 2% when considering that the principal disappears upon your death. Your Social Security investment is not an equity investment. Its an annuity. 26 Aug, 01:46 PMReply ! Report Abuse Like 13 AuCoaster Comments (466) | + Follow | Send Message Also keep in mind that if you keep working, your SS benefit will be reduced. So, early participation might not pay as well as you think. The amounts held back will be paid to you after your regular retirement age (66?). But, I dont remember the details of how this works... 26 Aug, 01:47 PMReply ! Report Abuse Like 2 alanctot Comments (15) | + Follow | Send Message Yes, the holdback is paid back after you reach your normal retirement age, but it is not a lump sum…..I believe its amortized over your remaining life expectancy….. 26 Aug, 02:22 PMReply ! Report Abuse Like 3 William Greenfield , contributor Comments (45) | + Follow | Send Message Robert, Thank you for this article. I would like to point out (as a CPA) that when you are discussing such a subject as this (when to take S.S.) you cant leave out taxes. I would even say that the tax implication of your choice is just as important as the actual choice. Warren Buffett once wrote in his partnership letters ...dont worry about the income, just the outcome. You should try to run scenarios in which you have your S.S. income with the dividends at the various rates and stages in life. Do this with a tax program that you know is good (there are so many variables that doing it by hand will guarantee it will be wrong). 26 Aug, 02:38 PMReply ! Report Abuse Like 13 Dividend Nut Comments (200) | + Follow | Send Message 4oclockguy, First of all welcome to S/A and to the comment stream. You picked a good topic to chime in on as, a least in my circle of friends (58-60) and all retired, this is an often talked about topic. We all agree that taking it early at 62 makes sense but for different reasons. One has a form of MD and expects a shortened life span, one has of a history of parents and family dying young. One needs the money as his pension is not keeping up with day to day needs. For me I will take it early, as we will us the extra income to travel more while I am still active and can hike around (knees are beginning to give out.). My cross over point is 79 and I remember my folks at 80 and the traveling they did had greatly reduced for medical reasons. While in our late 50s and early 60s we feel like we can go on forever but often medical issues creep in and we are not able to do as much as we get older. I see retirement as 3 phases: The 1st is the travel phase where we are traveling and taking trips to new destinations. The 2nd phase is we are traveling but mostly to see the kids and grandchildren. The 3rd phase is the tea and biscuit phase where the family will come and visit you. Depending on your health and finances these phases can and will vary from person to person IMHO. For me I want to enter the phase 1 as soon as possible and have it last as long as possible. The decision is simple for me. See you on the trails... DivNut 26 Aug, 03:07 PMReply ! Report Abuse Like 48 Water Buffalo Comments (427) | + Follow | Send Message Robert, If you earn less than 8% on your investments then waiting is probably a good decision. This is true IF your main goal is more money. If your main goal is more time, and you can live on that lesser amount, then waiting is the bad option. It all comes down to priorities. I think RAS did a good job making that point in the article. The numbers are there for all to see, but in the end, they are just numbers... and only individual preferences truly matter. 26 Aug, 03:11 PMReply ! Report Abuse Like 13 TAS Comments (2007) | + Follow | Send Message This presents an interesting - and quite under served- income and benefit topic on SA. Although I do not qualify for ss benefits due to my defined benefit as per the 1986 tax law revision package, and have lost more than $150,000 in extorted contributions, not counting my wifes contributions which are also lost I have no hope of recouping, I am sure social security, treated as a bond within a wealth management scheme, needs to be carefully examined by all investors who qualify for benefits. 26 Aug, 03:21 PMReply ! Report Abuse Like 5 jenksjr Comments (212) | + Follow | Send Message Dividend Nut, Good comments to a good article. My plan was to hold off on SS until I could receive about $2200 a month. Which I believe will occur in the next 6 to 8 months. I then will be about 64. That way my wife, who, at this point, wont get a benefit until she takes a spousal benefit at age 66. At that point she should receive at least $1100 a month. At that point our combined SS should be about $40,000 a year. I used a calculator on TRowe Prices web site to run the scenarios to see what would be a reasonable accumulated income for the next 20 years. Away, it was a good article help get the discussion going and reading come great comments. 26 Aug, 03:53 PMReply ! Report Abuse Like 5 xbureaurat Comments (153) | + Follow | Send Message AuCoaster I think your talking about the ARF(automatic reduction factor). If your still working at age 62 and decide to file for early retirement because you can receive some checks each month once you hit FRA(full retirement age) your benefit is increased for each month you did not receive a full retirement check. One of the main benefits of this is each year you will probably receive one partial check prior to reaching FRA. If your lucky your partial check will be close to your full benefit rate and is essentially free money to you. If your an hourly worker and have a good relationship with your employer you could probably plan it so your partial SS check would be very close to a full benefit check. I retired from SSA a few years ago and I assume it still works this way. 26 Aug, 04:37 PMReply ! Report Abuse Like 4 WMARKW Comments (10263) | + Follow | Send Message 4 oclock...thanks. You covered many of the same bases I am currently reviewing. My concern has always been me dying prematurely and leaving my wife will less than adequate income. For that reason, I have supplemented with insurance on me. The cost of health insurance is a significant reason to continue working when the alternative is to pay $800 or $1000 a month premiums for COBRA or for Medicare Supplements. 26 Aug, 04:38 PMReply ! Report Abuse Like 6 WMARKW Comments (10263) | + Follow | Send Message Just to clarify. It makes no sense to take SS at 62 if you are still going to work and make more than the minimum allowable (less than $1200 - $1300 a month if I recall). That min allowable is a monthly figure. In any month you make more than that number you start getting dinged. Over a certain amount....you get zero. I dont have facts on the holdback being paid at some future date. 26 Aug, 04:43 PMReply ! Report Abuse Like 6 martinfrosa Comments (1195) | + Follow | Send Message WMARKW, The holdback is paid later - follow the link (second paragraph). 1.usa.gov/YWC70f 26 Aug, 04:52 PMReply ! Report Abuse Like 5 chowder Comments (7349) | + Follow | Send Message Does anyone know if the number being used to penalize earnings above the minimum allowed is based on gross or taxable income? 26 Aug, 05:15 PMReply ! Report Abuse Like 3 mo2036 Before you comment, why not add your picture? Add Your Comment: Publish SEEKING ALPHA PRODUCT UPDATES • This Weeks Outstanding Performance Award Winners: Matthew Dow And Inefficient Market by SA Editor Daniel Shvartsman Top Ideas 1. TransAct Technologies: After A Sell-Off, Investors Have A Great Opportunity To Own This Debt-Free 4% Yielder by ValueArtifex 2. True Gold Mining Brings Good Karma To Your Portfolio by Itinerant 3. EQT Corporation: The Midstream Advantage by Richard Zeits Dividends & Income 1. The Pathway To Creating Wealth With REIT Diversification by Brad Thomas 2. A Healthcare High Dividend Stock With 25%+ FFO Growth; Yielding Over 7% by Double Dividend Stocks 3. 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