Don’t Foul Out with Social Security

This article, authored by Kyle Rudduck, CFA, Vice President, Wealth Strategy and Portfolio Manager, NB&T Wealth Management Group, appeared in the Wilmington News Journal on April 2, 2014.

If you’re like me, you’ve been watching a lot of basketball over the last couple of weeks. And, if you’re like me, your bracket is now completely busted (thanks Mercer and UD). However, even though I’m no longer in the running to win a billion dollars from Warren Buffet (or even any money in my office pool for that matter) I’ve still found myself watching many of the games until the very end. In doing so, I noticed a common trend in the final minutes across nearly all the close games – the team that is trailing will foul members of the opposing team in an attempt to prolong the game. They are willing to concede a point or two via free-throws to the opposing team for the opportunity to better that score with their next offensive possession. In a way, this strategy is similar to one that individuals nearing retirement can utilize to increase their income stream while ultimately bettering their standard of living in their post work-life glory days.

For individuals born between 1943 and 1954 (the age group considered here), Social Security considers “full retirement” age to be 66 but will allow participants to begin taking withdrawal payments at age 62. However, for each year past age 62 that an individual can defer taking Social Security payments, until the benefit ultimately stops increasing at age 70, the amount he or she will receive increases. For example, let’s assume for simplicity sake, that an individual has retired and can earn $1,000 per month ($12,000 annually) from Social Security at age 62. Based on estimates obtained from the Social Security Website, if that individual could instead postpone taking payments until “full” retirement age (66), they would be able to draw nearly 33% more income or $1,333 per month ($15,996 annually). If that individual could postpone taking distributions until age 70, or the last year for which the benefit will grow (aside from standard cost of living increases), the payment received by the individual would be approximately $1,759 per month ($21,115 annually) or nearly 76% more than what that individual would have drawn by electing to receive Social Security at age 62.

Now—increasing payments by deferring the age at which they begin to be taken is all well and good but how is it similar to committing fouls at the end of a basketball game? Commonly, Social Security will not be an individual’s sole source of income in retirement. Hopefully, the retiree has been diligent in saving throughout his or her career and has accumulated some sort of nest egg (i.e., Employer sponsored 401k plan, an IRA Account, Bank Certificates of Deposit, etc.) to supplement living expenses in the retirement years. By having these accounts at the retiree’s disposal, the individual has options as to which sources of income to draw from to fund living expenses in retirement. Most likely, as the individual has moved closer towards retirement age, the risk profile of their investment portfolio has gradually become more conservative as a means to better protect principal (which also comes at the expense of sacrificing potential return). Especially given today’s low interest rate environment, it may make sense to draw first from an investment portfolio for a couple of years and defer taking Social Security given the payment’s implied, compounded annual growth rate, past age 66, of approximately 7.2%. Said another way, you’d be willing to concede a couple of points to the other team today, or take distributions from your portfolio now, for the opportunity to better your income for the rest of your life, beginning at a later date.

There are many variables (including, among others, those such as life expectancy, estate planning goals, and tax implications) that play critical roles in an individual’s overall retirement planning assessment and everyone’s scenario is unique. While the above scenario and example may work great for certain individuals it does not guarantee that it is in the best interest of every individual nor is Social Security the only factor that plays into maximizing an individual’s financial standard of living in retirement. With that said, what the above example does attempt to demonstrate, is that there are numerous options available to virtually every person nearing retirement and putting together a good game-plan early on can greatly enhance your overall odds of success.

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