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  • Discuss Latest WCI Blog Post: What’s the Best Age to Take Social Security?

    Is it best to delay taking Social Security or to take it early? Guest post author, David Graham, MD analyzes the question.

    The post What’s the Best Age to Take Social Security? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.


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    Today’s guest post about when to claim Social Security was submitted by David Graham, MD, a physician blogger, and advice-only financial planner. If you want the “TL;DR version” read the last paragraph. Because when all is said and done, the primary value of social security is as longevity insurance. So it’s a bit like Pascal’s Wager. If you live a long time, you’ll be glad you waited to claim. If you die early, it doesn’t matter because you won’t run out of money anyway. Enjoy the post. We have no financial relationship.]

    Almost 2 years ago, White Coat Investor hosted a Pro/Con post about when to take social security. Dr. Cory S. Fawcett argued to take social security at 62 years of age, and Dr. Dahle at age 70.

    The scenario focused on a single high-income earner who retired at 62. Dr. Fawcett suggests taking social security early allows more spending early in retirement, or more time to invest. Dr. Dahle feels taking social security at 70 is superior as it guarantees returns, allows Roth conversions, and provides longevity insurance.

    When Should You Take Social Security? 62 or 70?

    So, who is right? Obviously, individual circumstances make all the difference, but let’s use professional financial planning software and run the numbers.

    Retiree Assumptions

    The good doctors agreed to use a $2M nest egg composed of 60% tax-deferred, 30% taxable, and 10% Roth. The index retiree draws on this nest egg starting at age 62. In general, it is most efficient to utilize the taxable account first, tax-deferred assets next, and tax-free assets last.

    Beyond that, I have to make a few other assumptions. Spending is $90,000 a year—a 4.5% withdrawal rate on the portfolio. Additional medical expenses start at $5,000 a year and increase by 5% a year. Otherwise, inflation is 2% a year. The primary insurance amount (PIA—how much one gets from social security a month at full retirement age) is $2,800.

    Stocks pay 7% (2% of which are dividends) and bonds 4%. Assume a 60/40 stock/bond portfolio, with the Roth 100% invested in stocks, and the other two accounts a mix of stocks and bonds to keep the overall asset allocation at target.

    In addition, a $34,000 yearly distribution is taken from the IRA from age 62-69. This distribution increases 2% a year to keep up with inflation. An explanation for including this distribution is found near the end of this post.


    With the above assumptions, taking social security at age 62 (henceforth called SS62) has Monte Carlo success odds of 62% vs 69% with delaying Social Security to 70 (SS70). These odds are slightly low, but I have chosen to model an aggressive withdrawal percentage from the portfolio.

    Portfolio Value over 30 Years

    Figure 1 (Portfolio value over 30 years)

    As seen in figure 1, SS62 (light green) increases in value for about 20 years, and then slowly decreases to an end balance of $1.6M. In contrast, SS70 decreases in value until payments start at 70, then does better and finishes with $1.95M.

    The cross over point—where SS70 is worth more than SS62—is 84 years of age (22 years after retirement). After 30 years, the SS70 portfolios is worth about $350,000 more than SS62.

    Source of Retirement Income of SS62 and SS70

    Figure 2 shows the source of income, which increases at 2% (5% for healthcare) to cover expenses. Purple represents social security income and orange withdrawals on the portfolio. Over the 30 year period, SS62 gets 20% of total income from social security, whereas SS70 gets 28%.

    Withdrawal Percentage of SS62 and SS70

    Seen above, SS62 starts at a 4.5% withdrawal rate and winds up over 10% after 30 years. SS70 has about a 5.5% initial withdrawal rate which then dips down at age 70, and slowly increases over time. Note the scale are slightly different, and SS70 winds up at about 7.5%, a lower rate than SS62.

    What About Taxes in Retirement?

    Taxes are an important issue to look at in retirement. Unlike in working years, retirees have amazing tax flexibility during retirement. The ability to control taxable income stems from the ability to withdrawal from different types of accounts.

    In the current scenario, a Roth account grows in the background undisturbed. Instead, money primarily comes from social security and the brokerage account, in addition to distributions from the IRA prior to the age of 70, and required minimum distributions (RMDs) from the IRA after age 70.

    Figure 4 shows the yearly taxes due with SS62 (light green) and SS70 (blue). Initially, SS70 pays less taxes (since part of the social security in SS62 is taxed) until RMDs force taxable income out of the IRA at age 70.

    David Graham, MD

    Taxes increase again for SS70 at age 79. Also, note that taxes increase for SS62 at age 82. Reviewing cash flow, this occurs when the brokerage account reaches zero and all income comes from the taxable IRA. Early claiming of social security kept the brokerage account around for 3 years longer in this scenario.

    Overall—over the 30-year period—SS62 is actually more tax-efficient, saving about $7,000 or $250 a year in taxes.

    What about Roth Conversions?

    Partial Roth conversions are useful to convert pre-tax money (such as IRAs and 401k) into never-taxable money (Roth). Roth conversions force you pay taxes the year you convert, but then you never have to pay taxes on the conversions again. Frequently, partial Roth conversions can be useful to lower future RMDs and decrease the overall lifetime tax burden.

    Figure 5 (The tax planning window for partial Roth conversions)

    As seen above, green shows the taxable income, and the lines demonstrate the different tax brackets. Note the lower number (ie 10, 12, 22, and 24) are the current tax brackets with the Tax Cut and Job Act. This act expires in 2026 which results in the increased tax rates seen (10, 15, 25, 28).

    From age 62-70, taxes remain in the 12% bracket. Staying in the 12% tax bracket keeps the dividends and capital gains rate at a favorable 0%. Income is obtained from a yearly taxable $34,000 distribution from the IRA, and from withdrawals from the brokerage account.

    The pre-70 years of age distribution from the IRA is optimal for several reasons. First, without it, the brokerage account rapidly expires and forced taxes up into the 24% tax bracket. Second, by taking out pre-tax IRA funds, taxes stay in the 12% tax bracket until age 70. At that point, RMDs kick in and taxes increase from the 12% bracket into the 22% bracket.

    In summary: the pre-70 age distributions decrease lifetime total taxes paid. I use $34,000 in this example, but unfortunately, the actual number needs to be calculated each year depending on other income.

    Moreover, is it optimal to stay in the 12% bracket in this scenario, which makes partial Roth conversion tax-inefficient.

    Income is not taken from the Roth account. This results in $1.2M in Roth funds after 30 years. Since more than half of the portfolio is left in Roth, aggressive partial Roth conversions are not indicated.

    Often, when optimizing an individual retiree’s plan, a Roth funds some retirement expenses. This allows spending flexibility without increasing taxable income for the times taxable income needs to be below certain thresholds.

    Taxes and Roth conversions are obviously complicated. While not mentioning other tax implications of retirement income planning, let’s briefly look at taxation of social security.

    Taxation of Social Security

    Your favorite Uncle taxes social security. In fact, when “combined income” is above $34,000 for a single filer ($44,000 for couples), up to 85% of social security is included in taxable income. To calculate combined income: take adjusted gross income + half of social security benefits + nontaxable interest (such as municipal bond coupons). Most high-income earners should assume they will have up to 85% of their social security taxed, as is the case for both SS62 and SS70.

    Income from Social Security

    Figure 6 (Total income over time from social security)

    Over time, see the total absolute income from social security in figure 6. In grey, SS62 starts at 62 and has a flat slope. In blue, SS70 starts at 70 and the increased slope reflects its higher payment. At age 78, 16 years after retirement, you get more absolute income from SS70 than SS62.

    Above, in figure 7, see yearly income from social security. SS62 is again in grey, and SS70 in Blue. SS62 starts at about $25k a year and increases to almost $50k after 30 years. With SS70, benefits start at $50k and increase to $76k after 22 years. In the end, there is $431k more absolute income taking social security at 70 than at 62 years of age.

    What about Sequence of Return Risk?

    Figure 8 (Effect of Sequence of Return Risk)

    It is fun to look at sequence of return risk and consider social security claiming strategy. What if a 2000-2010 scenario happened just at retirement?

    Above, you can see SS62 in light green initially does better than SS70 in blue. This is due to the fact that income from social security allows you to sell less equity when it is down due to a poor sequence of returns.

    Due to the initial sizeable hit in the portfolio, however, neither makes it 30 years, though the SS70 shows its usefulness as longevity insurance.

    A Quick Primer on Social Security

    For those born after 1960, full retirement age is 67. You get your PIA (primary insurance amount) if you wait until your full retirement age.

    If you claim after, you get 8% simple interest every year you delay until 70. So, you can get 24% more delaying social security 3 years beyond your full retirement age. Beyond 70 there are no additional increases, so it never makes sense to delay social security past 70.

    If you claim early, you lose 5/9 of 1% for each month you claim early, up to 3 years. This is a 20% decrease in your PIA if you claim at 64.

    You can claim as early as 62, in which case you get a 30% decrease in your PIA, or 5/12 of 1% for each month you claim early between 36 and 60 months.

    To know when the right time to claim, you must know how long you are going to live. Since that is a guess, do you want a smaller benefit sooner or a larger benefit later?

    My Thoughts About the Scenario and Assumptions Made

    Social security claiming strategy is complicated even for a single, well-to-do retiree. In this scenario, I selected a healthy withdrawal rate from the portfolio since Dr. Fawcett suggests that an early claiming strategy allows you to spend more earlier in retirement, or gives your investments time to grow.


    In addition, some would suggest my return assumptions (7% for stocks and 4% for bonds) are too low.  Perhaps it is better to plan conservatively and be happily surprised if everything works out better than planned.

    As a side note, investing the relatively small amount you get from social security at 62 and expecting it to compound equivalent to the much larger benefit at 70 reminds me of savings rate in FIRE. For the 8 years you are investing social security returns with an early claiming strategy, there just is not enough money or time for higher return assumptions to make that much of a difference. To compound, you need time and a significant amount of money to start with. It is unlikely the “take it early and invest it” philosophy will be a winner over a guaranteed 24% higher payout.

    What Did We Learn?

    In absolute dollars received from social security, it takes 16 years to make more money with a delayed strategy, right at about $500,000 paid out (as per figure 6).

    However, (as per figure 1) it takes 22 years for portfolio size to actually catch up. That is, the 8-year investing head start buys 6 extra years where portfolio size is larger due to claiming early.

    Another way to say this, at least in this scenario, you have to live to about 85 to make a delayed claiming strategy make sense.

    Take Less Social Security Now or More Later?

    Don’t ignore social security in your future projections. It is clear social security will change over time but it is difficult to predict the future.

    Your choice: take less now or more later? Even for a single, well-to-do physician, the decision is a difficult one.

    It will take 16 years to catch up in absolute terms. If the money is invested, it takes 22 years. Do you plan to live that long after retirement?

    Social security, as it is indexed to a measure of inflation, is the best cost-of-life-adjusted annuity around. There is no annuity on the market nearly as good.

    If you might live a while, a delayed claiming strategy makes sense. As money is fungible, you can spend other assets and postpone social security. The guaranteed return on investment is sweet. And if you die early, you won’t need the money anyway. But if you live a long and glamorous life, you might just be glad you waited.

    When do you think is the right time to take Social Security? Do you plan on delaying or taking early? Comment below!

    The post What’s the Best Age to Take Social Security? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    Fantastic post. I applaud both WCI & Dr. Fawcett on a well written article & detailed explanations & data. I have been wondering about this recently, mostly as theory, but somewhat relevant to family members approaching 62 I'm another 2 years.
    "Oh look another bajillion point declin-Ooooh!!! A coupon for pizza!!!!" <--- This is what everyone's IPS should be. ✓✓✓


    • #3
      Sometimes a bird in the hand...

      Nice analysis.


      • #4
        I find this fascinating to think about but I find it hard to apply it to my life at this point. Being in my 30's I have a lot of time for the rules to change and any planning now would likely be moot. Other then I will likely get some sort of SS at some point.
        From the people I know in real life (not docs) it seems most take the money as early as possible. I do not think they do so in order to invest it


        • #5
          This really applies to me. I am 62. I recently retired. I am not taking social security. I recently sold a house and kept some of the money in my local checking. This will fund my first retirement year. I have a large taxable account that pays more in dividends and interest than I spend. I will take social security at 70. My thinking is that the inflation indexed annuity is a good long term care hedge. On a psychological level it would be nice to have a "paycheck" hitting the bank but the math favors waiting if you are healthy.


          • #6
            Compliments to Dr. David Graham. Please do not take any comments negatively. The exercise is excellent in that it shows the combination of a Roth, IRA, SS and taxes.
            One little nitpick. The health insurance between 62 and 65 will be a little bubble in the expenses. The graphical presentations are perfect illustrations that show the concepts. For those in the accumulation stage, it was an excellent presentation of the three concepts:
            • Delay social security as long as you can
            • Tax efficient withdrawals
            • Tax impacts
            For those a little farther, married and when to take a primary and secondary social security and play in the taxes are emotional as well as mathematical. The problem is similar to sequence risk. It's basically a one time choice. Claim early on the spouse or delay? The trick is survivor benefits for the spouse upon ones death. Every year you survive past 85 or so you lost money. Like everything, the choices end up emotional.

            Not to steal the thunder, but Mike Piper has some additional reading and tools.
            I would simply suggest everyone pick out a planning too and run it through about 90 or so. No need to be concerned about the detail, just get used to the three concepts covered in the article. It can't hurt you. The added value is that it is transferable (parents, spouse, siblings, and children). The numbers change but the concepts are the same.


            • Larry Ragman
              Larry Ragman commented
              Editing a comment
              Mike Piper has done a lot of work to help think through SS claiming strategies. For the married among us, it simplifies to the higher earning spouse delaying until 70 as longevity insurance and a survivor benefit, and the lower earning spouse taking SS whenever convenient but probably once stop working. As I said, this is a gross simplification, but go to his blog, the Oblivious Investor and you can read why.

          • #7
            It is best to delay SS as long as possible but only IF you account for that higher future income and how it allows you to take more risk with your the rest of your investable assets.

            I was stumped for years about how to do this in any quantifiable way, but I think I've come up with a decent strategy:
            I have gone to to calculate my PIA based on my accumulated earnings to date. I assume this is what I will get as an annuity at age 70 (presuming this will be FRA for me with changes in the program in future decades).
            Convert this to a present value of future annuity for 30 years.
            Treat this as a TIPS fund in my asset allocation.

            I did a similar exercise for my defined benefit plan (but treated it as a corporate bond).

            After I did this, I felt like my portfolio was much heavier in fixed income than it should be. I haven't made any changes yet, but at the end of the month if I haven't changed my mind I will probably go more aggressive with equities.


            • #8
              So someone asked for me to link the blog and forum together better. I think this is probably as good as it gets without major software challenges. Let me know if you guys like the feature. It'll be stickied automatically for two days after the post runs then unstickied automatically. They can be moved into the appropriate forum if needed, but will all post in general to start with.
              Helping those who wear the white coat get a fair shake on Wall Street since 2011


              • #9
                I think this is a good idea. I do not think it is necessary to copy the whole post in here but whatever.


                • The White Coat Investor
                  The White Coat Investor commented
                  Editing a comment
                  I'm trying to find a middle ground between just the title and the whole post. Might add the posts from POF, PIMD, and TPP too.

                • Lordosis
                  Lordosis commented
                  Editing a comment
                  I think a link would be sufficient. Any comments from the author would be welcome.

              • #10
                The original intent of the linkage was that WCI had two completely separate platforms: blog and forum. Synergy linking was thought to be beneficial from content and comments. One observation, the audience and comments from my observation are “different”. Same article and two discussion streams for two different audiences probably is the way to go. The adding the sticky for a few days is cool. The release let’s it fade and take its separate paths. Don’t see any benefits attempting to move comments back and forth.


                • #11
                  Larry Ragman
                  I pointed the link to Piper’s SS site. Your comment about whenever convenient is the emotional choice. The wife just retired. Wait till FRA? Delay some or all? She is locked into a smaller benefit until YOURS truly passes. It’s in my benefit for her to delay if I’m still around. She wins as long as I delay till 70. The magic age is 85. What’s holding me back is my MIL that’s pushing mid 90’s. The calculator says “claim”!
                  But I plan to be around until 90. It’s just math and emotions. Not easy choices. At least finances aren’t pressing, that’s why I don’t work!


                  • Larry Ragman
                    Larry Ragman commented
                    Editing a comment
                    Tim, my point was that Piper wrote a summary on the Oblivious Investor in which he specifically tried to cut through endless do loops with Monte Carlo simulations. His conclusion regarding the lower earning spouse timing was that it just didn’t matter very much. Higher earning spouse claims at 70 so either he or she lives longest and thus has highest possible benefit, or dies and surviving spouse inherits that highest benefit. The lower earning spouse will get something very close to half of the higher earning spouse regardless while higher earning spouse lives. It would be more if he or she waited, sure, but we are talking a few thousand a year. Doesn’t move the needle.

                • #12
                  I like the sticky feature. Regarding posting the entire article, I say go with a "snippet". If I like the appetizer, I'll click to the main course.
                  "Oh look another bajillion point declin-Ooooh!!! A coupon for pizza!!!!" <--- This is what everyone's IPS should be. ✓✓✓


                  • #13
                    Say you take it at 62 and collect until you are 70. Would you consider repaying all the money you had collected up until age 70 so that you could have a higher payment going forward?


                    • #14
                      “However, if you change your mind 12 months or more after you became entitled to retirement benefits, you cannot withdraw your application.”

                      Unlimited time period would be fantastic!


                      • #15
                        I am 3 years older than my spouse. We have both passed the SS second bend point. For medical reasons I might not even reach 62. I would say in our situation my spouse should clearly wait until 70 while I claim early or my spouse gets survivor benefits until turning 70. Does anyone know if there is a minimum age at which one dies to qualify for survivor benefits (not the age of the survivor to start receiving)? Sorry for the morbid post.