With my full retirement age (FRA) approaching in a couple of years, I decided it was time to make some decisions about when I would begin receiving my Social Security benefits. Should I begin at my FRA, at age 70, or somewhere in between? After reading half a dozen books and innumerable articles on the topic, and viewing countless YouTube videos, I’ve come to an inescapable conclusion.
Social Security is a joke. But it’s a joke that needs to be taken seriously.
As of March 2022, the average Social Security benefit is just $1,536 per month up just $33 from the average in 2020. That’s not much more than walking around money. Why are there a bazillion articles about maximizing your Social Security when there is very little that can be done about the benefit amount? You might as well write an article about maximizing the change you find under your couch cushions.
There are really only three ways to increase Social Security benefits: (1) make more money during your working years so you pay more into the system; (2) continue working more years with higher wages to replace some of your lower earning years in the 35 year calculation, and/or (3) wait until age 70 to start taking benefits. Not much to discuss.
And again, that $1,536 is the AVERAGE. Meaning, if my public education hasn’t let me down, that many fall below that number. For example, even if you have 11 good years of paying into Social Security, but earn only the threshold amount, you would receive just $41.90 per month. Thirty years or more of minimum earnings brings you to $872.50. Not much of a safety net. On the other end of the spectrum, the maximum benefit in 2022 at full retirement age is $3,345 (with a maximum of $4,194 if you waited until you are 70). Less than 6% of Americans receive the maximum amount.
Time to get serious.
But with all that said, Social Security requires some serious consideration. The reality is that 21% of married couples and 44% of single seniors rely on Social Security for 90% or more of their income. You may think and swear that you are not going to be one of those people who relies on Social Security, just like I swore I would never eat a deep fried Snickers bar at the County Fair, but sometimes life doesn’t work out the way you planned. (It was actually quite good.)
In slight defense of Social Security, the average amount is so low in part because so many people (34.3%) elect to start taking their benefits at age 62 and hence receive far less than if they waited. There are certainly circumstances that justify taking your Social Security so early, and no doubt many who do so share my view that you should get into the system before it changes, but I think the bulk of these people are driven by the concept of Hyperbolic Discounting. Simply stated, we humans are hard-wired to prefer a smaller reward sooner, over a larger reward later. In one article I read, in response to the question, “Why do so many retirees start Social Security at age 62?”, the answer was, “Because they can’t take it any sooner.” They are willing to take the 30% loss in benefits now over 30% more benefits five years from now. As you can see from the chart below, 76% take their benefits before they turn 67. And while most all of the pundits argue that one should wait until age 70, just 3.7% do so.
The Security Factor
Almost universally, the sources I researched pooh poohed the idea, to use the technical term, that Social Security will fail. They all state with confidence that Social Security will keep paying benefits forever, at the same approximate levels. Everyone acknowledges that the system is in trouble, but most conclude that the problem will be addressed with in increase in the payroll tax.
The belief that Social Security will keep right on paying is unfathomable to me. As the Social Security Administration states right on its own website, “If trust fund assets are exhausted without reform, benefits will necessarily be lowered.” The Social Security system guarantees you NOTHING. In the case of Fleming v. Nestor, the U.S. Supreme Court ruled that workers have no legally binding contractual rights to their Social Security benefits, and that those benefits can be cut or even eliminated at any time.
My own situation is typical, and illustrates the vagaries of Social Security. When I started paying into the system with my first job, the full retirement age was 65. Social Security had always represented a terrible return on investment – a fraction of what you could make if left to your own devices – but as a society we were willing to put up with it because it offered a safety net for those with no other retirement income (which could turn out to be us). That was the promise. Pay into the system, and you could take your social security retirement, tax free, at age 65.
But after I had paid into the system for 11 years, the government came along and said:
“Remember when we told you you could retire at age 65? Well, uh, we kind of had our head up our ass on that one. Now, you’re going to have to wait until age 67. Oh, and it’s not going to be tax free anymore. We’re going to take it from your after-tax dollars, and then when we’re going to tax you again when you get some of it back.”
I think it is probably true that some form of Social Security will always exist, if for no other reason that neither political party wants to be the one that does away with it. But as the 1983 and 1993 reforms made clear, it is not untouchable, and Congress has no compunction against changing the rules. They have already extended the retirement age by two years, so I am sure they will come along with life expectancy statistics to justify pushing out the retirement age another few years.
A full 80% of millennials are already convinced that they will never receive a dime of Social Security. If the government announces tomorrow that the retirement age has been raised to 70, and the benefits have been reduced by half, a large percentage of younger Americans would greet the news with a shrug.
Personally, I think future Social Security benefits will be subjected to a needs test. Rather than treat it as an entitlement, some tiered system will be created, with the “wealthy” being deprived of any benefits, even though they paid into the system. And we know that the definition of wealthy is variable.
If this sounds unlikely to you, in reality it is already present in the Social Security system. The benefit calculation already includes what are euphemistically called “bend points.” The formula seeks to give lower income workers a higher percentage of their former income. So, a needs test is already baked into the system, with lower income workers receiving credit for a full 90% of their Average Indexed Monthly Earnings (AIME), and higher earners receiving only 15%.
We all want to help the less fortunate, but Social Security justifies its existence by claiming that it is not a form of welfare, but rather is an insurance program. If I buy a million dollar life insurance policy, at the time of my death they don’t come to my widow and determine if she really needs the money.
I agree with the millennials. I don’t trust the government or the system. But I do think it is less likely that once you are receiving benefits, that they will try to claw them back. Based on past behavior, the government feels that it can reduce benefits if the reductions apply only to future recipients. To tell current recipients that their benefits are being cut, when they have based all their financial planning on the numbers and promises, will hopefully be a bridge too far.
I will still be working, because I happen to love the business I created, but you can bet that I will begin my Social Security benefits the day I reach my full retirement age. I can’t get the benefits started fast enough, because I am confident if I don’t grab them, the government will change them.
With that attitude, why didn’t I start them at age 62, you might ask. For me it made no sense to do so. Because I was still working, the benefits would have all been taxed away. Also, that seems to be a case where you would be guaranteeing a lower benefit for life, out of fear that the government might lower your benefit. How does that make sense? I think that if your circumstances do not mandate that you take them early, then you have to just run the risk that things won’t change drastically in the intervening years. (The same might be said of waiting until age 70, which leads us to the next consideration.)
The Quality of Life Factor
God bless my wife. Thirty years ago, when we were about to enter into matrimonial bliss, we decided we would honeymoon in Hawaii. Then it dawned on me about two weeks before the wedding that I couldn’t pass up the opportunity to scuba dive while I was there (having previously dived only in California and Mexico). While busy with wedding plans, she still managed to train for and obtain her scuba certification so we could dive together on our honeymoon.
So anyway, my wife and I love to scuba dive, and Hawaii is one of our favorite dive destinations. I explain in this linked article how to fly to Hawaii for free, and we envision our retirement involving lots and lots of scuba diving around the Hawaiian Islands.
All the financial pundits argue that, if finances permit, one should wait until age 70 to begin taking Social Security benefits, in order to maximize the benefits for life. They point out that your benefits will grow 8% per year for the years that you wait, which is better than any other investment you are likely to find. Further, the goal is to make sure you don’t run out of money in your later years. Even if you have some other sources for retirement, such as a 401k or IRA, you could deplete those if you live longer than anticipated, and all you will have is your Social Security. You’ll be glad you waited those three years in order to maximize your monthly benefit.
As my Dad used to say, “Thunder on that!”
First, for the reasons stated in the prior section, there is no way I’m going to give the government three more years to get into mischief with my Social Security benefits. But the other consideration is, when will you gain more benefit from your money?
Would I rather have the money now when it can be used to fund the scuba diving retirement we both envisioned, or later when I’m too infirm to enjoy it?
The Social Security site has a rather sobering life expectancy calculator, which shows how many years, on average, you can expect to receive benefits beyond your full retirement age. It states that I can expect 18.1 years of benefits, with the reaper coming to visit at age 85.6.
The same Social Security site used to include a break even calculator, showing the date at which you would have been better off if you had delayed in taking your benefits. They apparently thought better of that and took it down because too many people saw how ridiculous it is to wait.
In my case, and this is how it works out for most people, if I begin my benefits on the day I reach full retirement age, I’ll be ahead of the game for almost 16 years, since the money I received before turning age 70 will more than offset the greater amount I would have been receiving it I had waited until age 70. But when I reach age 82, a big “L” will appear on my forehead, because I would have earned more if I had waited the 44 months to begin taking my benefits, thereby making me a loser.
When you do these break even analyses, the numbers are always pretty shocking. I briefly considered, during a raging fever no doubt, waiting just until age 67 (like you youngsters) to begin my benefits, just for bragging rights that I had not started my benefits right at full retirement age. Based on the chart above, doing so would put me in the top 10% of financial wunderkinder. But even that eight month delay meant I would not catch up to the benefits I lost for more than 12 years!
So based on Social Security’s own life expectancy calculation (and since they write the checks they certainly know when people tend to die), I’m only going to wear that “L” on my forehead for 3.6 years. I can take the money at my full retirement age of 66 years and 4 months, when hopefully I am still fit and able to travel and dive, or I can wait and have a little more money for the last 3.6 years of my life, when I will hopefully still be “strong like bull,” but probably not as fit. For planning purposes, I look at my mother in law, who is in her 90s and still very healthy and able to travel, but not likely to be strapping on a diving tank anytime soon.
If I cheat the Reaper and live past 85.6, then maybe I’ll regret my choice. But I look at it this way. The difference, according to my Social Security Statement, is $1,000 per month. The way things are going, by the time I reach that age, minimum wage will be $50 per hour, so I only need to work 20 hours per month to make up the difference. If my health doesn’t allow me to work, then I probably made the right choice to take the money when I could enjoy it.
Here is a YouTuber I follow, Devin Carroll, who is knowledgeable and pretty even handed about the realities of Social Security. In this video, he discusses the history of Social Security, and how the benefits are not guaranteed.
In the following video, Carroll discusses in greater detail the concept of Hyperbolic Discounting, and offers his analysis on when to begin taking Social Security benefits. He takes a more number-based approach to the analysis, and is willing to trust the government far more than I do. So while I don’t necessarily agree with his conclusions, it is information you should certainly consider. There are other factors, such as maximizing the spousal benefit, that also need to be considered.
Finally, I discussed the three variables that impact Social Security benefits. But as far as financial pundits being able to increase your benefits, there is really only one important variable. Workers earn what they earn, and presumably would take a higher paying job if one was available, so absent a time machine, a pundit can’t do anything about the worker’s income, past or present. (If you are self-employed, be sure to read to the end of this article.) The next variable is working longer to replace some lower earning years in the 35 year calculation. But in the video that follows, Josh Scandlen crunches the numbers to show that working more years makes very little difference in your benefits. Scandlen certainly doesn’t waste any money on his set, but he provides great information. His channel is called Heritage Wealth Planning.
That means the only real variable impacting your Social Security benefits is how long you wait to start. Like I said, not much to discuss.
Additional considerations for the self-employed.
As someone who runs their own business, you no doubt take advantage of every legal deduction in order to lower your taxable income. (Did you know that the IRS actually went to court to argue that structuring your financial affairs in a way to minimize your taxes was illegal? Thankfully the court ruled that was a crazy position. But I digress.) However, if you reduce your income enough, it will of course impact the amount you receive from Social Security.
I started this article with the premise that the amounts paid by Social Security are so small, that it is kind of a joke. If you have your own business, you are likely far better served with your own investment vehicles such as a SEP IRA or Solo 401(k). But when that moment comes where you are deciding whether you should deduct your dog as a business expense, because he provides security for your home office (an actual recommendation by someone on TikTok), keep in mind that taking that deduction will save you money now, but lower your social security payments later (if your income is such that you will not be receiving the maximum payment in any event).