People become eligible to collect Social
Security retirement payments at 62 years old. But each year until age 70,
monthly benefits rise. So the longer you wait to collect, the higher your
payments. The question is should you wait? In her New Jersey Star-Ledger
financial advice column, the “Biz Brain”, Mueller answered the
following question:
Q. What are the advantages and disadvantages to retiring, taking
Social Security and leaving my 401(k) intact?
Mueller, citing one expert, advises:
One of the most important things to retirees is consistent, stable
and predictable cash
flow, said Jerry Lynch, a
certified financial planner with JFL Total Wealth Management in Boonton.
“If I have a product that would guarantee you an 8
percent annual increase up to age 70, was
indexed for inflation and guaranteed for life, would you move all your money
into that? That is Social Security,” he said.
Lynch said Social Security is one of the most underestimated
benefits out there, noting the more guaranteed income you have in retirement,
the less stress you will have when the market is volatile like now.
For that reason, it could be smarter to tap your 401(k) and let
your Social Security benefits grow, but you should sit down with a financial
planner who can assess your assets and cash flow and see exactly where your
personal situation stands.
But would it really be “smarter to tap your
401(k)” early?
Lynch’s advice seems to be typical of most
advisers. At a glance, it seems like a no-brainer. But there’s more to the
issue than Lynch and these other advisers lead us to believe. Lynch’s 8% growth
argument is misleading, since it ignores other factors, such as the growth of
the 401(k) that you would be forgo.
Suppose you retire at 62. You have a significant
IRA nest egg. Let’s say you are entitled to $2000 per month at that time, which
rises to $3300 by age 70, if you wait. If you wait, you must start draining
your IRA. Rather than start taking IRA withdrawals, you take the $2000 per
month, and let your IRA grow without touching it. At age 70, you will have
collected about $178,000, along with having a much larger IRA. If you wait
until until 70, you would collect $3300 per month, but with a depleted IRA.
Furthermore, waiting until 70 would require 11+ more years to “break even” with
the $178,000 in SS benefits you wouldn’t have already collected had you waited
until 70.
Waiting until age 70 to collect would leave you
with no financial savings cushion--or a much reduced one--and the hope that you
will live long enough to get back the $178,000 you left on the table for those
8 years. You’d have your higher monthly payments, but not the security and
peace-of-mind that a hefty nest egg could provide.
Of course, if you have a big enough savings
cushion to make withdrawals while still getting growth, it might make sense to
wait until age 70 for that $3300 per month (although I don’t think so). And if
you’re really healthy, you could be a big winner by living well past 81.
But keep in mind that “guaranteed income” is not
by any means guaranteed. It depends entirely on the whims of politicians. You
have no property right to that money you pay “into the system”—and never have.
You are not legally entitled to the promised benefits—and never have been. The
politicians can lower or rescind the benefit at any time. As CATO reports, “One
of the most enduring myths of Social Security is that a worker has a legal right
to his Social Security benefits. Many workers assume that, if they pay Social
Security taxes into the system, they have some sort of legal guarantee to the
system’s benefits. The truth is exactly the opposite. It has long been law that
there
is no legal right to Social Security.”
I would think very carefully before taking the
advice of waiting until age 70 to collect your Social Security benefits.
Related Reading:
Conflicting opinions about Social
Security:
According to Brenton Smith, the
temptation of collecting early could cause you decades of hardship. Mark Hulbert presents arguments in
favor and against taking Social Security payments early.
Why it's a bad idea to count on Social Security.
Here's why you
should not rely on what was originally intended to be an income supplement for
the elderly.
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