One way to extend a client’s income later in life is to delay Social Security checks. After all, the sooner you take it, the less you get per check. The longer you delay, the larger that check gets. After all, you’re pulling from a larger pool of money over a shorter time frame, presumably.
However, it’s hard to pinpoint exactly how delaying Social Security will affect your client’s finances, because there are a lot of assumptions involved. There’s no absolute answer, short of having a crystal ball to predict the future, which we all wish we could do.
Short of predicting the future, the next best thing we can do is look at the general math of it all, to understand how Social Security plays with other assets. This way, you can educate your clients on the concept of delaying Social Security, and where the “crossover” point is, so they can make a decision based on how long they think they will live.
Longevity Risk and Social Security
The “crossover” point in Social Security income refers to the point at which you’ll “make” more money by delaying. In the example we’ll use here shortly, the client actually receives a greater volume of money from age 62 to age 88 than they do if they start taking income at age 70.
Of course, while the person taking income at 62 receives less money annually, they have 8 additional years of accumulation. After that “crossover” point, the person who delayed until age 70 is coming out on top. Their annual SS income is almost double.
This is where the question of longevity risk comes in. What is the client’s life expectancy? How long do they expect to live? These are important questions that should ultimately drive the choices clients make.
While delaying might make sense from a purely mathematical standpoint, it doesn’t mean much if the client passes away before they hit age 88. In that case, all that’s happened is they earned less money than they could have. But, again, there’s the rub—we don’t have a crystal ball. We only have math and statistics—applied to the client’s lifestyle—to make this choice.
It only makes sense to delay SS if the client can reasonably expect to live past the age of 88. Fortunately, we know that the odds of that in general are pretty good. Life expectancy seems to be ever-increasing, and the longer you live, the longer you can expect to live (yes, your life expectancy improves as you age). It comes down to your client’s personal habits. Fortunately, Living to 100 has a good life expectancy calculator based on the most updated actuarial tables.
The Math of Taking Social Security
So what are the specific numbers? Remember that this is highly specific, while the exact numbers change based on the client’s circumstances, the overall math of it can be widely applied.
Below, we’ve got a 62-year-old who wants to retire now. He makes $150,000 currently, and is trying to decide if he wants to take Social Security now or later. (Note: These SS numbers are hypothetical based on BankRate’s calculator, or you can use the Social Security website’s quick calculator.)
In the Cash Flow calculator, you can see that by taking approximately $25,000 of income at age 62 and putting it into savings at 4%, the client will have just over $3 million by age 100.
If he delays his Social Security to age 70, his annual income goes from $25,664 to $46,512. However, he’s playing 8 years of catch-up. Which means that until age 88, the client’s total account value is still less than if he took the income at age 62. Beyond that age, however, his value is always greater. And by age 100, he has almost $3.5 million in savings.
Below, you can see the exact crossover point pinpointed in the graph from our Side-by-Side tool.
If this is the client’s retirement income, why are we even viewing it as if it’s savings? Well, we like to come at it from an opportunity standpoint first. This is a look at the overall opportunity of this money, assuming that he’s not going to spend it. This gives us some insight into the overall impact of the Social Security money. After all, when used for income, it’s going to have a different impact depending on whose wallet it goes into. This is where the assumptions come in.
Taking Social Security as Income
So let’s look at a more macro approach to taking Social Security, and assume that the client will be using this as income and to pay his expenses.
Assuming the client’s SS information all stays the same, let’s imagine that he has an account at $1 million for retirement income, earning 4%. His expenses are about $50,000 when he retires at age 62, yet they’re increasing slowly over time. As you can see below, that account lasts him until age 100 with some to spare. Yet this assumes that his expenses never increase drastically.
Note: Expenses appear GREEN even though it’s a withdrawal because it’s flowing away from the account, into the client’s “pocket.” The SS income is RED even though it’s a deposit because it’s flowing away from the client’s pocket and into the account. If you were to toggle one or the other off, this becomes clear.
Assuming all else is the same, here’s what happens when the client delays his SS income until age 70. The difference is much more slight, and the client only ends up with a little over $100k more at age 100.
Let’s look at the graph in Side-by-Side. As you can see, when the client delays, his total account value goes down before it goes back up, thanks to his expenses. And it isn’t until about age 93 that he reaches the crossover point.
Pure Mathematics vs. the Personal
Armed with this knowledge, what is the right choice? In this instance, it’s hard to say. There are a lot of assumptions happening. Based on pure mathematics, there is a marginal improvement in delaying, yet only if the client lives to at least age 93 (assuming he will spend the income). However, what is his personal life expectancy? Depending on that, he may not want to delay.
There’s also much that can’t be predicted—additional expenses in retirement, higher inflation and taxes, etc. And if this account is correlated to the stock market, what would the results be?
What you can do is to help a client see the bigger picture and make choices about their finances with confidence. What if they keep working until age 70, while they delay SS income? What if they have whole life insurance to use as a Cash Flow Bridge for their distribution income? Could a reverse mortgage provide additional income? Maybe they want to improve their lifestyle habits to increase their longevity. There are so many things to consider that contribute to the whole picture.
Ultimately, what gives the client peace at night? That counts for a lot as you guide your clients to make a choice.
For more financial insights and instruction on how to use the Truth Concepts calculators effectively, attend a Truth Training. In 3 days, you’ll get the run-down on the entire suite of calculators so that you can go back to the office ready to use Truth Concepts.