Draw Social Security Earlier to Combat Sequence of Returns Risk

[Maximus28]

I have a family member that is about to turn 67, they retired 3 months ago. They could take social security now and get $2,600/month or wait until 70 and get $3,000/month.

I have no reason to believe there is a shorter life expectancy, which would generally mean to wait and take the larger benefit at 70. The invested assets are $1.2 million, they live on about $60k/year and the assets are allocated to 60% stocks/40% bonds.

With inflation rising and a bear market, that $2,600/month cash flow is becoming more and more valuable to claim now. This would reduce the draw on the invested assets by over $30k/year and avoid selling while both stock and bonds are underperforming.

I am leaning towards recommending drawing social security now to hedge against sequence of returns risk. What are your thoughts?

[Financial.Velociraptor]

I'm not quite 50 yet but have always planned to take SS at the earliest eligibility date.  Bird in hand and all.

I consider it an annuity and part of a bond allocation.  Will rebalance appropriately.

[harvestbook]

I don't hate it.
I'd look at the tax picture, too. Withdrawing $60k from a tax-deferred account equals a decent tax bill. Withdrawing $30k gets you close to the exempted amount, depending on how the SS factors in. This move wouldn't make them the "most money" but it seems like it would boost the chance of the money lasting and give peace of mind.
As always, it depends.

[lutorm]

I don't hate it.
I'd look at the tax picture, too. Withdrawing $60k from a tax-deferred account equals a decent tax bill. Withdrawing $30k gets you close to the exempted amount, depending on how the SS factors in. This move wouldn't make them the "most money" but it seems like it would boost the chance of the money lasting and give peace of mind.
As always, it depends.

Won't there be required minimum distributions anyway, if those assets are all in a tax-advantaged account?

The other factor to consider is survivor benefits. If they have a younger partner that would be eligible to take over the benefits when they pass, it might make more sense to wait.

Another perspective is that with 60k spending, 36k of which coming from SS, they're at a 2.0% WR. With 31k of it coming from SS, they're at 2.4% WR. They would not have been even close to running out of money under any historical scenario, so I think you'll be fine either way.

[MDM]

...a family member...they retired....

Single or married?

[MustacheAndaHalf]

They could take social security now and get $2,600/month or wait until 70 and get $3,000/month.
... The invested assets are $1.2 million, they live on about $60k/year and the assets are allocated to 60% stocks/40% bonds.

Are you sure there's only a 15% increase between ages 67 and 70?

For someone born 1954 (a year earlier?), the Social Security Administration (SSA) mentions these numbers:
"67, you'll get 108 percent of the monthly benefit ..."
"70, you'll get 132 percent of the monthly benefit ..."
https://www.ssa.gov/benefits/retirement/planner/1943-delay.html

132 / 108 = 1.22, or a 22.2% increase in benefits.  I think that $2600/mo would turn into $3178/mo, which is much higher than you mentioned.  And since my source is the SSA itself, I'm going with the numbers I found.

[Maximus28]

132 / 108 = 1.22, or a 22.2% increase in benefits.  I think that $2600/mo would turn into $3178/mo, which is much higher than you mentioned.  And since my source is the SSA itself, I'm going with the numbers I found.

I need to double check the paperwork, it probably is more like $3,178/month. Does an additional $178/month change your answer?

...a family member...they retired....

Single or married?

Single

[Maximus28]

Won't there be required minimum distributions anyway, if those assets are all in a tax-advantaged account?

The other factor to consider is survivor benefits. If they have a younger partner that would be eligible to take over the benefits when they pass, it might make more sense to wait.

Another perspective is that with 60k spending, 36k of which coming from SS, they're at a 2.0% WR. With 31k of it coming from SS, they're at 2.4% WR. They would not have been even close to running out of money under any historical scenario, so I think you'll be fine either way.

Yes, everything is in tax-advantaged accounts. Don't need to worry about survivor benefits, no spouse.

I guess the real question is: Where is the break point when social security claimed now is worth more than waiting for it to increase? If a 60/40 portfolio is down 15%, for example, and takes two years to get back to 0% down (either from previous high or January 1st) then the $120k withdrawn over 2 years would be equivalent to drawing $135k in the pre-drop portfolio. This is assuming each year over the 2 years the portfolio recovers equally. I know, big assumption.

If the portfolio is down 30% and takes 2 years to recover, that would be equivalent to drawing $156k in the pre-drop portfolio. Meanwhile, social security goes up about 8% per year the beneficiary waits. So in my mind, if the portfolio is down much more than 8%, why not offset the sequence return in the down years?

Based on the invested assets and drawdown, we can wait until 70 to draw SS and be fine. I would like to create a portfolio loss guideline to help make the decision of when/if to draw that SS sooner.

[wageslave23]

I wouldn't try to predict what the stock market will do. It's down about 20% now but could easily drop another 30%. Currently this a mild correction, unless we have a recession and it's drops significantly more, then I would stick with protecting against longevity risk and take ss later. Unless we have a severe market downturn, delaying social security will probably be the safer route. You may end up with less money, but who cares as long as you have enough. Trade upside in order to lock in a higher floor. Dying early is the only real risk (other than trading upside) and again who cares, you're dead in that scenario.

[frugs]

No way. Assume they could live to be 90 and beyond. No way would I recommend to get SS early.

[PDXTabs]

I'm not quite 50 yet but have always planned to take SS at the earliest eligibility date.  Bird in hand and all.

I consider it an annuity and part of a bond allocation.  Will rebalance appropriately.

These are my thoughts as well. Take it ASAP and use the money to be more aggressive in the rest of your holdings. YMMV.

[reeshau]

No way. Assume they could live to be 90 and beyond. No way would I recommend to get SS early.

This is the way I think of it.  There are many countermeasures to SORR.  How would the relative feel about getting an entry-level job while the market is down?  Would their former job invite part-time / consulting work?  Do they have room to reduce their withdrawal rate while their portfolio is down?  All of those would only be needed as long as the downturn lasts.

Social security is the only option that won't run out, unless you have a defined benefit pension, or set up your own annuity.  Your relative is running at 5% WR, and could use the "old age insurance" that a maxed SS is.  And once you decide to start, that decision is irreversible.

[secondcor521]

I guess the real question is: Where is the break point when social security claimed now is worth more than waiting for it to increase?

I use opensocialsecurity.com to answer this question.  Note that there is an "additional input" checkbox at the top which allows you to play with the discount rate used.  How your portfolio is invested (among other things) may affect the discount rate used.  Generally it tells me to wait until 70 to take mine.

That website also ignores the impact of Roth conversions, which some of the cool kids in their 50s and 60s are doing these days and can provide a wealth benefit to some.

If one's WR% is low enough, SORR is probably not a big risk.  Although with a low WR%, longevity risk is also probably not a big risk.

It's regularly and probably endlessly debated over at early-retirement.org forums.

[Bateaux]

My wife is 3 years older than me.  She will likely start taking SS early at 62 or 63.  We may wait on mine.  I'll probably have a higher amount.  Her amount would pay our health care expenses.  My pension will pay about 55K a year and will cover most all our other expenses.  My SS could pay for inflation losses to my pension over time and increased healthcare.  Our 401Ks and Roth IRAs could grow without a lot of distributions until into our 70s.  I plan on most of those RMDs going to charity.  Once we receive SS payments I don't see much need for spending a lot of our savings.  We could easily Fat FIRE right now, but I'd feel guilty not saving money for charity later in life.

[MustacheAndaHalf]

132 / 108 = 1.22, or a 22.2% increase in benefits.  I think that $2600/mo would turn into $3178/mo, which is much higher than you mentioned.  And since my source is the SSA itself, I'm going with the numbers I found.

I need to double check the paperwork, it probably is more like $3,178/month. Does an additional $178/month change your answer?

Do you expect inaccurate numbers to result in a useful conclusion?

You don't seem to be taking a lot of effort to provide accurate information here.

[ChpBstrd]

I attended a presentation once where the analyst from our 401k vendor showed the math on this question. The result was that each year one delays SS is equivalent to buying an annuity with an 8-9% rate of return, perfectly safe and inflation adjusted, even after factoring in the lost payments and assuming a normal lifespan. The advice was to take that kind of safe ROI any time it's offered. I suspect the advice was oriented toward people thinking about retiring in their early 60's vs. doing OMY, but the meaning for anyone with significant savings is a little different.

In terms of SORR, we're talking about trading off some of one's stache to obtain a higher pension payment later. It's like buying an annuity each year after age 62 that will pay you 8-9% for the rest of your life. Obviously, if you could trade your entire stache for such an inflation-adjusted annuity paying such rates, it would make sense to do so. You'd be financially bulletproof with 8-9% returns and a 4-5% WR unless you started a Lamborghini collecting or cocaine habit. So each year you get the opportunity to buy that annuity is an opportunity if you can afford to take it.

A 70 year old with a smaller stache and a fat SS payment is more insulated from SORR than a 70 year old with a larger stache and lower SS payment. A long bear market in stocks is going to affect the latter much more than the former.

[Telecaster]

^ You can run the numbers in cFIREsim.   Delaying SS is the better option.  At least it is in my case.   And the reason is SORR.   By delaying SS you are backstopping your portfolio against a poor series of returns early in the withdrawal period.

[Car Jack]

I used to think for quite a while that I would take SS at 62.  But I mistakenly believed that when the trust fund emptied, SS would be gone.  That's not what will happen.  I'm now 65 without taking SS and won't till 70.  One thing is taxes when considering Roth conversions and reducing RMD generating account balances.  So my whole strategy now is that I'll pick a tax bracket I'm willing to go to and pull RMD generating account money out to hit the top of that bracket.  I really don't need the SS money so waiting till 70 and letting the payment amount increase is fine.  I'm overfunded anyways, so am just looking to minimize taxes.

[SeattleCPA]

^ You can run the numbers in cFIREsim.   Delaying SS is the better option.  At least it is in my case.   And the reason is SORR.   By delaying SS you are backstopping your portfolio against a poor series of returns early in the withdrawal period.

I agree with @Telecaster. Also with his suggestion that one test using cFIREsim. You can prove or disprove.

[seattlecyclone]

Of course once you've already retired and are experiencing a poor series of returns early on, the sequence of returns risk transforms into sequence of returns reality. Given that reality, you may find that taking your benefits early so that you can minimize asset sales when the market is down and thereby mitigate the long-term damage associated with a poor sequence of returns may indeed look like the optimal choice. Dig deeper into the cFIREsim results. In which retirement start years did waiting to take social security turn out better, and in which retirement start years did that strategy turn out worse?

[park10]

I plan to take Social Security the very 1st day I am eligible. I may even go to the local SS office before it opens that morning lol, for one sheer irrefutable fact -- that no one has absolutely any idea (none whatsoever) of when they will die... So assuming I am alive on the day I turn 62, I am taking it right away and depending on my money situation then, either invest it or start spending it. Thats my plan and I hope everyone does the same....

[Financial.Velociraptor]

I plan to take Social Security the very 1st day I am eligible. I may even go to the local SS office before it opens that morning lol, for one sheer irrefutable fact -- that no one has absolutely any idea (none whatsoever) of when they will die... So assuming I am alive on the day I turn 62, I am taking it right away and depending on my money situation then, either invest it or start spending it. Thats my plan and I hope everyone does the same....

Quoting you b/c the forum lacks a "like" or "+1" function.  Bird in hand friend.

[EvenSteven]

I plan to take Social Security the very 1st day I am eligible. I may even go to the local SS office before it opens that morning lol, for one sheer irrefutable fact -- that no one has absolutely any idea (none whatsoever) of when they will die... So assuming I am alive on the day I turn 62, I am taking it right away and depending on my money situation then, either invest it or start spending it. Thats my plan and I hope everyone does the same....

Eh. A lot can change over the next 20 or 30 years, but my plan right now is to not collect early if either my wife or I are still working. If we are both retired, I (the lower earner) will take as early as possible, and my wife (the higher earner) will take as late as possible.

[blue_green_sparks]

I plan to take Social Security the very 1st day I am eligible. I may even go to the local SS office before it opens that morning lol, for one sheer irrefutable fact -- that no one has absolutely any idea (none whatsoever) of when they will die... So assuming I am alive on the day I turn 62, I am taking it right away and depending on my money situation then, either invest it or start spending it. Thats my plan and I hope everyone does the same....

I retired around 3.5 years ago, and I turn 62 in less than 3 months. If I take it right away, it will drive up my health insurance costs and my income taxes considerably. My tentative plan is to take it at 65 when I have to transition from ACA to Medicare, but I may wait longer if I am still healthy. The three cumulative SS income curves (62, 65, 67) converge (break-even) at age 80 in my case. After that, the longer I waited the better.

[frugal_c]

I am with the folks who say to delay, the inflation adjusted rate of return is just too good to pass up.   This individual has $1.2M so there is not much risk of them running out of funds and it's not like they are locked in.   If you think of this persons retirement accounts of being their $1.2m funds and then the social security bucket, by taking out later you are effectively diversifying from the investment bucket to the SS bucket.

Also remember that it's not like this decision is set in stone, they can sign up whenever they want right?  If the market got cut in half over the next 6 months then I would say that would be the time to sign up for SS, right now it's not a compelling argument.

[park10]

I am with the folks who say to delay, the inflation adjusted rate of return is just too good to pass up.

-- What is the use of a high return when there is no assurance that the person might even be around to collect that high return ??

[EvenSteven]

I am with the folks who say to delay, the inflation adjusted rate of return is just too good to pass up.

-- What is the use of a high return when there is no assurance that the person might even be around to collect that high return ??

There are very few assurances in life. There is a chance that they will be around, and a chance is often enough. I pay for insurance even though there is no assurance that I will use it to cover a disaster. One way to look at delaying SS collection is as a form a longevity insurance.

[frugal_c]

I am with the folks who say to delay, the inflation adjusted rate of return is just too good to pass up.

-- What is the use of a high return when there is no assurance that the person might even be around to collect that high return ??

As EvenSteven points out it is old age and poor market insurance.   I guess it depends on how you rank the risk of missing out on SS vs living long and not having enough.   I am far more concerned about the latter.

If you die early, what does it really matter?  In this case, the person still has investments so if they die young they will have something to pass on.  I just would never ever want to end up in poverty in my 90's and this reduces the risk of that.  Personally I have had family make it to 100 even, that's a long time and a lot can happen in the market.

[iluvzbeach]

We plan to take SS the day we are each eligible. One reason for this is because we’d rather let our stash continue to grow and take advantage of what we’ve been paying into for years. When one of us dies and the lower SS payment goes away, the surviving spouse will still have access to our stash. If we’d depleted much of it while waiting to draw on SS, I think this would put the survivor at greater financial risk. That said, I have not modeled this out on cfiresim.

[Telecaster]

We plan to take SS the day we are each eligible. One reason for this is because we’d rather let our stash continue to grow and take advantage of what we’ve been paying into for years. When one of us dies and the lower SS payment goes away, the surviving spouse will still have access to our stash. If we’d depleted much of it while waiting to draw on SS, I think this would put the survivor at greater financial risk. That said, I have not modeled this out on cfiresim.

FIREcalc is a little easier for this.  However, I do recommend running the simulation.   In my case, delaying not only improves portfolio survival, I can actually increase the WR.   To put it another way, delaying allows me to spend more money in the early years of retirement.  I don't know if that is true universally, but I suspect it is.

Several people have pointed out the longevity problem. You can't spend your SS if you are dead, which is undeniably true.  You could apply the same thinking for your portfolio.  Why not take a 4.5% WR instead of 4% in order to maximize your spending while alive?  I don't mean to create a straw man, I'm just pointing out that longevity risk (that is, outliving your portfolio) is something we already all think about and factor into our planning.  It is perfectly rational to want to improve portfolio survival by delaying. 

Still dying is a real thing.   Based on your family history or current health condition, it might make sense to take SS early.   But people on this board should keep in mind that financial security is tightly correlated with longevity, adding several years to your lifespan over the typical American,  and nearly a decade and half longer than poor Americans.   

One final twist is that many people are married.  This article by Kitces points out that the odds favor the lower income spouse to take early, and the high income spouse to delay.

https://www.kitces.com/blog/why-it-rarely-pays-for-both-spouses-to-delay-social-security-benefits/

[Telecaster]

-- What is the use of a high return when there is no assurance that the person might even be around to collect that high return ??

That high rate of return allows you to safely retire sooner. 

[Mr. Green]

The factor that's going to matter more than anything else is what the market is doing between ages 62 and 70. If a deep bear market occurs it will be well worth it to take SS early and avoid the draws on portfolio during the downturn. So really it's a game time decision for everyone unless your stash is so large at that point that you simply don't care anymore

[iluvzbeach]

We plan to take SS the day we are each eligible. One reason for this is because we’d rather let our stash continue to grow and take advantage of what we’ve been paying into for years. When one of us dies and the lower SS payment goes away, the surviving spouse will still have access to our stash. If we’d depleted much of it while waiting to draw on SS, I think this would put the survivor at greater financial risk. That said, I have not modeled this out on cfiresim.

FIREcalc is a little easier for this.  However, I do recommend running the simulation.   In my case, delaying not only improves portfolio survival, I can actually increase the WR.   To put it another way, delaying allows me to spend more money in the early years of retirement.  I don't know if that is true universally, but I suspect it is.

Several people have pointed out the longevity problem. You can't spend your SS if you are dead, which is undeniably true.  You could apply the same thinking for your portfolio.  Why not take a 4.5% WR instead of 4% in order to maximize your spending while alive?  I don't mean to create a straw man, I'm just pointing out that longevity risk (that is, outliving your portfolio) is something we already all think about and factor into our planning.  It is perfectly rational to want to improve portfolio survival by delaying. 

Still dying is a real thing.   Based on your family history or current health condition, it might make sense to take SS early.   But people on this board should keep in mind that financial security is tightly correlated with longevity, adding several years to your lifespan over the typical American,  and nearly a decade and half longer than poor Americans.   

One final twist is that many people are married.  This article by Kitces points out that the odds favor the lower income spouse to take early, and the high income spouse to delay.

https://www.kitces.com/blog/why-it-rarely-pays-for-both-spouses-to-delay-social-security-benefits/

Telecaster, thank you for your response. I’ll definitely look further into it. DH is soon to be 62 and I’ve got another decade to go. We will be starting his SS later this year & we will explore what makes the most sense for mine. I have been the high wage earner, so it’s possible delaying mine to 65, 67 or even 70 may make sense. I think if he were to pass away before I started drawing on mine, I could draw on his (as long as I was at least 60) and then get a larger check on my SS benefits when the right age comes around. Hopefully that will not end up happening, but is something to consider.

[Telecaster]

The factor that's going to matter more than anything else is what the market is doing between ages 62 and 70. If a deep bear market occurs it will be well worth it to take SS early and avoid the draws on portfolio during the downturn. So really it's a game time decision for everyone unless your stash is so large at that point that you simply don't care anymore

That might be true in some specific cases, but I don't believe it is true generally.   I didn't want to spend too much time on this, but I ran two scenarios in FIRECalc.   Let's say we have a Mustachian who retires right at age 62, with a standard portfolio of $1.5 million and a $67,000 annual spend (4.5 % WR).   He made a modest but decent income and will receive $1100/mo SS if he claims at 62, or $2000 by delaying to age 70.  I picked 4.5% because I think it is reasonable to assume at age 62 that you can count on some future SS payments for planning purposes.  We also know that the minimum portfolio value would be the worst historical sequence of returns.  So in this case if you started SS at 62 you were bang-on minimizing portfolio drawdown. 

Both portfolios survive 100% of the time, but the worst case performance for the claim early scenario was $2,200 and $343,000 for the delayed portfolio.   Delay increases portfolio safety by a lot in this case.  Similar outcome if you use 4% WR.   In my own situation retiring before 62, delaying also increases the minimum portfolio value by a lot. 

Individual cases are so variable, e.g. retirement age, SS income, health, spending, etc. so I don't want to make a blanket statement that it is always better to delay.    But in general the 8% + inflation gain by delaying is so powerful it wipes out early SoR risk. 

[MDM]

DH is soon to be 62 and I’ve got another decade to go. We will be starting his SS later this year & we will explore what makes the most sense for mine.

Open Social Security: Free, Open-Source Social Security Calculator might be worth your time.

[Mr. Green]

The factor that's going to matter more than anything else is what the market is doing between ages 62 and 70. If a deep bear market occurs it will be well worth it to take SS early and avoid the draws on portfolio during the downturn. So really it's a game time decision for everyone unless your stash is so large at that point that you simply don't care anymore

That might be true in some specific cases, but I don't believe it is true generally.   I didn't want to spend too much time on this, but I ran two scenarios in FIRECalc.   Let's say we have a Mustachian who retires right at age 62, with a standard portfolio of $1.5 million and a $67,000 annual spend (4.5 % WR).   He made a modest but decent income and will receive $1100/mo SS if he claims at 62, or $2000 by delaying to age 70.  I picked 4.5% because I think it is reasonable to assume at age 62 that you can count on some future SS payments for planning purposes.  We also know that the minimum portfolio value would be the worst historical sequence of returns.  So in this case if you started SS at 62 you were bang-on minimizing portfolio drawdown. 

Both portfolios survive 100% of the time, but the worst case performance for the claim early scenario was $2,200 and $343,000 for the delayed portfolio.   Delay increases portfolio safety by a lot in this case.  Similar outcome if you use 4% WR.   In my own situation retiring before 62, delaying also increases the minimum portfolio value by a lot. 

Individual cases are so variable, e.g. retirement age, SS income, health, spending, etc. so I don't want to make a blanket statement that it is always better to delay.    But in general the 8% + inflation gain by delaying is so powerful it wipes out early SoR risk.

Still having 100% of your original portfolio balance at 62 would be borderline "having enough to not care" in my book. I think where it really starts to matter is for people who have already drawn down the stash some. I think I remember modelling that out with firecalc a while back and taking early could be the difference in protfolio failure or not. Certainly this is specific to the individual. I'll have been retired basically 30 years at that point so I expect it's reasonable for my stash to be less than what I started with by then. I will be trying my best to ensure that is the case.

[iluvzbeach]

DH is soon to be 62 and I’ve got another decade to go. We will be starting his SS later this year & we will explore what makes the most sense for mine.

Open Social Security: Free, Open-Source Social Security Calculator might be worth your time.

Thank you, MDM. I’ll check it out.