Do you think that delaying Social Security until 70 is a good idea because the break-even point is at 80 or 81 years old? It may not be the right decision for you. This post will use a real-life client example to show how seemingly sound financial decisions can have a profound impact on your plan.
The Case of Greg & Sherry:
Greg and Sherry were a couple of 62 years old who approached us to retire immediately. The couple had a large portfolio that included 401(k), Roth IRAs and savings. They also owned a home. They wanted to maintain a $6,000-per-month lifestyle in retirement, after accounting for taxes and healthcare costs.
Key Assumptions
- Investing aggressively: 90% stocks and bonds, 10% diversified stocks. Expected annual return of 8.8%.
- Longevity: Projected lifespan until age 95.
Social Security Dilemma :
Traditional analysis shows that delaying Social Security benefits until 70 years old will yield greater lifetime benefits. A detailed analysis reveals that a key factor is often overlooked: the impact of delaying Social Security on your overall financial plan.
Initial analysis: Greg and Sherry’s portfolio would continue to grow, allowing them the opportunity to pay for their expenses. The net result was positive.
Contrary to expectations: The apparent increase in benefits that they received when delaying Social Security up until 70 years of age came at a price. Their portfolio was strained during the years they were not receiving Social Security income, which resulted in a loss of over $400,000 at the end.
Investment Growth and the Role of Investment:
James emphasizes the often-underappreciated role of the rate of return on investments. In a hypothetical situation with a growth rate of only 6.3%, postponing Social Security to age 70 was more financially beneficial, adding $850,000 to the overall wealth.
Understanding Break-Even Ages:
The break-even age has been cited by many as a reason to delay Social Security. However, this analysis shows a nuanced view of the situation. The break-even age may still be around 86, even with the wealth that is created from delaying.
Your financial plan will affect the decision you make about when to start collecting Social Security. It is important to take a holistic approach that takes into account factors such as investment growth, tax consequences, and other sources of income. A personalized analysis of your individual circumstances and not a one-size fits all solution is essential.
Remember that while navigating the Social Security landscape, the best strategy for one individual may not be the right choice for another. To make informed decisions and ensure a comfortable retirement, it is important to seek professional advice that is tailored to your specific financial situation.
