One Tough Decision – The Social Security Dilemma

As the New Year begins, I have been laser-focused on reframing my strategic goals from a wealth building strategy to a retirement planning strategy. One of the necessary steps required in developing strategic goals focused on retirement is Social Security. More specifically, when to apply for Social Security: as soon as possible, at full retirement age, or when the law requires you to?

For me, time is money and a dollar today is worth more than a dollar tomorrow. I have always looked at retirement as a financial number and not an age. However, since Social Security is about both time and money, I thought I should run the numbers to see which option of age is best.

There are two aspects to the retirement dilemma of when a person should apply for his or her Social Security benefits. No one can apply for the medical aspect of Social Security before 65, so this question, when should a person apply for Medicare, is a self-answering question. Even your Social Security statement provides direction to apply for Medicare at age 65 even if you continue to work.

What I am more interested in concerns the monetary benefits and when is the most advantageous time to apply for those benefits. There are several theories with multiple variables that complicate this question. A person may apply for Social Security any time after his or her 62^nd birthday. The earlier a person applies, the more the monthly benefit is reduced.

No one wants to receive a reduced benefit, but one needs to be fully informed before deciding on the age of retirement. As I have said, retirement is not an age for me, it is a financial number. If a person has been diligent in managing his or her finances throughout the working years, he or she is likely to have a significant amount of financial resources going into this decision.

Ideally, a person could live off of his or her retirement savings until he or she reaches the age of 70, but at what cost? If a person has enough retirement savings off of which he or she could live, then why wait until the age of 70 to apply for Social Security benefits? A lot can happen between the ages of 62 and 70.

Based on the number of variables one must account for in this equation, including the work history of a person, choosing when to begin to receive benefits can be a difficult decision. Your financial work history determines the value of your benefits. A lower wage earner will likely have to work longer and therefore, the age at which he or she will apply for benefits will be determined by his or her ability to build wealth in tax-favored accounts such as 401ks and IRAs.

When my older brothers decide to apply for benefits will be vastly different from when I decide to apply simply because of our financial work history. In my case, age has very little to do with that decision, outside of having to at least be 62. Whereas, in the case of my eldest brother, age is a factor and in the case of my 2^nd eldest brother, age has everything to do with it.

So for those whose age is not a determining factor, the question of value becomes the most important factor. Social Security benefits have a see-saw type value structure. The earlier one applies for benefits, the less that person receives. The later a person applies, the more a person receives. This see-saw causes many financial planners to disagree as to when would be the right time to apply for benefits.

When it comes to making this decision, each person must consider the following. The time value of money and the value of time. These are two real questions each person must answer. Beyond that, one must consider, on a practical level, is there a fair trade-off between these two? The best way to analyze two dependent factors is to determine where the middle of the see-saw lies.

A person, who decides to receive Social Security benefits at age 62 gains 5 years of retirement for a discount of benefits, but to what does that translate? I have developed the following table to illustrate how the Social Security see-saw works.

At age 62, the worker in the above example would receive $1,784 a month of $21,408 annually. He or she would do this for five years essentially enjoying five years of retirement while his or her peers continue to work. Ready for the first variable to this calculation? While the person who stopped working at 62 enjoys 5 years of retirement, the people still working continue to contribute to the system. Calculating in the potential loss of additional benefits due to no longer contributing is a variable that cannot be known.

What if the person who decided to continue working and contributing suddenly lost his or her job due to a down-turn in the economy? What if that person suddenly became ill and was not able to recover? These variables will affect a person’s reality, but cannot easily be accounted for in figuring out future benefits or the loss thereof. So let’s keep the math simple and go on the information provided in the table.

The person who takes benefits at 62 would receive $107,040 during those five years, essentially exchanging the reduction in benefits for time. This is the value of time of which I spoke. If he or she had waited and chose to take benefits at 67, he or she would not break-even for another 11 years. Therefore, taking benefits at the age of 62 gains the person 16 years of retirement before the extra benefits would begin to be realized.

The annual difference between the benefits at 62 and 67 are $9,372. Given that the person retiring at the age of 62 would receive $107,040 in those five years, the break-even point would be age 78. Assuming that those 16 years are healthy years, if this were you, would you exchange $107,040 for 16 years of not having to work?

Now let me introduce you to the next variable. Your lifestyle. Everybody has a different reason to retire. Some want to travel, some want to find a vibrant community of like-minded individuals and socialize, and others just want to spend time pursuing a dream they have always wanted to, but never had the time to. This is a real factor, but not one that is a sound basis for deciding when to take benefits. Therefore, focus on the see-saw: time value of money and the value of time.

If the person who is 62 had waited until he or she was age 70, the trade-off would be 8 years plus another 10 years to burn-up the cash. The difference between the annual benefits of 62 and 70 would be $16,908. However, the amount of benefits received in the 8 years that separate those two target years would have been $171,264. This equates to just over 10 years of retirement beyond age 70 before the person would reach the break-even point. That is 18 years of retirement at a cost of $171,264.



At this point the person who decided to take benefits at age 62 would be 80 years old before he or she reached the break-even point. Again, what do you value more, time or money? You can always make money in retirement: write a book, sell a craft, or offer your knowledge for a fee… but you cannot manufacture more time. Money has a current. That is why they call it currency. It circulates and sometimes more flows to you and sometimes more flows away from you. But time is absolute. Once it is gone, you can absolutely not have more.

As previously alluded to… every person’s situation, financial work history, and motivations are different. There is absolutely no right or wrong answer as to when to retire and take your Social Security benefits. There is only a right and wrong answer for you, by you. No one can determine what is best for you, except you. However, I wanted to offer a different perspective. A different way to think about the question of retirement and Social Security.

For me, retirement is not an age, it is a financial number and when I hit that number, I am moving on because for me, time is far more valuable than money. I would rather have 18 years to relax than $171,264 in benefits. But then again, that’s just me.