When Should YOU Claim Social Security?

Social Security is available from the time we turn 62 years old.  But there is a penalty for taking it before our full retirement age–the payment is lowered.  And there is a benefit for taking it later than our full retirement age–the payment increases for every year we defer until age 70.  There is no reason to defer past 70.

For most of my readers, your full retirement age is 67.  For those born between 1938 and 1959, your full retirement age is between 65 and 67.  For those born before 1938, your full retirement age is 65.

Conventional wisdom says if you are in good health, you should wait until age 70 to claim Social Security because that maximizes your payment.  The payment grows 8% per year from your full retirement age until 70.  8% sounds like an amazing increase until you realize you are trading twelve months of payments for that increase.

And conventional wisdom assumes you are living paycheck to paycheck.  You get your Social Security and you spend your Social Security.

If that’s your situation, then you’ll claim it when you need it to pay your bills and put food on your table.

But I suspect many of my readers are in our situation:  We will have other resources available to pay our bills.  We will claim Social Security so we optimize our long-term finances.

When we take Social Security, we will have more money available to invest.  We will essentially be investing our social security payments.

For this exercise, I went to SSA.gov and selected Retirement Estimator, I verified my identity with personal information including last year’s earnings.  I then created estimates of my payments for age 62 (early retirement), 67 (full retirement) and 70 (late retirement) based upon $0 earnings between now and then.  My estimates are below.  You should do the same exercise as your numbers will differ from mine.  The benefits are based upon your highest 35 years of earnings.

SS Estimator

You can see, there’s a huge payment decrease (57%) if I claim at 62 rather than 70.  But keep in mind, I’m giving up $167,520 of payments not including Cost of Living Adjustments (COLA) by claiming at 70 ($1,745 x 12 months x 8 years).

I then created a spreadsheet–Y’all know how much I love my spreadsheets!  This one took these different payment amounts and increased them by a 1.8% COLA each year from now on.  1.8% is the average COLA over the last ten years and should approximate inflation.

If I’m living paycheck to paycheck, spending my Social Security as soon as it is received, claiming at 62 is best unless I live past 76, Claiming at 67 is best unless I live past 79.  I’m planning to live well into my 80’s so for me, claiming at 70 would maximize my lifetime payments.  (Average life expectancy  of someone who reaches age 65 is 84.3 years for men and 86.6 years for women)

SS 1.8 0

There are great arguments for just stopping here.  This outcome isn’t dependent on investment success, economic stability or sustained cognitive abilities as I age.  But I think it’s worth looking at my real scenario.

If I have other resources and can essentially invest my Social Security, the crossover ages change depending on my investment success.

With a 1.8% COLA and 6% investment returns, claiming at 62 is best unless I live past age 84, Claiming at 67 is best unless I live past age 88:

SS 1.8 6

 

See how 6% almost equalizes the outcomes regardless of the date claimed?  Whichever you choose, you’re within $100,000 of the other decisions if you reach your mid-80’s.  I like this because if I choose to claim early for my peace of mind, I’ll come out OK compared to the other options.  We’re talking over 30 years into the future so $100,000 isn’t much of a difference in today’s dollars.

With a 1.8% COLA and 8% investment returns, all three scenarios come together between age 95 and 97:

SS 1.8 8

But they are virtually identical once I reach 80.  So again, claiming at 62 for my peace of mind wouldn’t be drastically wrong.

This makes me think of my Mother In Law.  She was a real estate agent in a real estate downturn and struggling financially.  She decided to claim when she reached 62.  She died unexpectedly due to medical error at 64.  I’ve always been thankful that she took her benefits early, the money reduced her stress and allowed her some luxuries.

Is it realistic to assume 6% and 8% investment returns?  Who knows what the future will bring but here are the historic returns of the S&P 500 including dividends:

S&P 10 year return 7.6%
S&P 20 year return 6.9%
S&P 30 year return 9.3%
S&P 40 year return 11.5%

What else should be considered before making this decision?

Earnings – if you claim before full retirement age but continue to work, Social Security will withhold $1 of benefits for every $2 earned above a limit ($16,920 in 2017).  The withholding calculation changes for the year you reach full retirement age.  But, you’ll effectively get these amounts back in the form of higher benefit payments once you reach your full retirement age.

Taxes – If Social Security is the only income you receive, you won’t pay taxes on it.  However, if you have other sources of income including wages, interest (including non-taxable interest), dividends, capital gains, pensions etc. up to 85% of your Social Security may be taxed.  The calculation is complicated (surprised?  I’m not).  You’ll need to calculate your “combined income” which includes gross income + nontaxable interest + 1/2 of your Social Security benefits.  If this amount exceeds $25,000 for an individual or $32,000 for a joint return, a portion of your benefits will be taxable.

Lower Paid Spouse – If you are the high earner in your family, your spouse’s Social Security benefit may be based on your earnings and your claiming decision.  The lower earning spouse can either claim the benefit they earned (if any) or a benefit based on half of the high earner’s benefit.  And if the high earner takes their benefit early, the spouse’s share is also decreased and if the high earner takes their benefit late, the spouse’s share is also increased.

If the lower earner claims early, the benefit decreases further.

When one spouse dies, the living spouse can take the larger of their own benefit or their deceased spouse’s benefit.

This area is a particularly tricky one–so tricky I’ve heard stories of Social Security Staff giving incorrect guidance.  If you are in this situation, it may pay to have an expert help you navigate your claiming decision.

Health Insurance under the ACA – Social Security benefits are included in the calculation of Modified Adjusted Gross Income.  So claiming benefits may cause a family to lose their health insurance subsidies.  Mr. Ms. Liz turns 62 next year (I’ll pause while you gasp!).  If he claims Social Security, we will need to manage our other income sources so we remain below the limits for the Obamacare subsidy.  This will likely mean he will not be able to continue his tax free conversions of traditional IRA to Roth IRA accounts.  With healthcare in flux, we’ll have to watch this impact closely.

So, what do you think?  Does this make you think differently about when YOU will claim your benefit?

Want to read more about this?  Check out my Social (in)Security is Complicated!

This stuff is super complicated and missteps can affect you for decades–consult an expert before doing anything with your own Social Security.

Source:  Social Security for Dummies by Jonathan Peterson

Photo credit:  Ms. Liz in Knowles Canyon, Lake Powell, Utah. ahhh my happy place!

The Joy of Working . . . When Working Is a Choice

The job I retired from was with a terrific company.  I spent 17 years working with some of my best friends and even my fake kid.

Each year, the CFO would gather her leadership group–the accounting, HR and IT professionals who reported to her for a “Summit”.  A gathering to share knowledge, communicate updates and, frankly, to spend some time wining, dining and team building.  Attending these Summits was always a highlight in my year–a paid vacation with my buddies.

I retired 14 months ago.  But this year, I was asked to attend the summit.  And wait, it gets better.  I was asked to ***geek alert*** present a short class on one of my favorite subjects–Excel.

Initially, I was both terrified and thrilled.  Terrified because I HATE public speaking.  My hope was that my short speech at my retirement party would be my last.  Thrilled because it was an incredible honor to be asked to return.  I was excited to see my former colleagues and I love teaching people about Excel.  Helping people with Excel was my favorite thing about my old job.

I got over my terror by convincing myself I’d just be sitting at a table behind my laptop screen.  And I was–it didn’t end up being scary once I got started.  It helped that the room was filled with my friends.

It was really invigorating.  The group was super excited to learn new tips and make their processes more efficient.  There was more than one “wow” comment while I was presenting.  How often does that happen?!

And I was asked to stay over–in a beautiful resort and join the group for dinner and shenanigans after my session.  The shenanigans included sake bombs that sent more than one person stumbling back to their room–thankfully, not me.

Oh, and I got paid to do this!  It will help me fund my IRA this year.

I spent a ton of time preparing.  I developed an agenda that allowed both novices and experts to walk away with a couple new tips.  And being ultra prepared helped me get over my fear.  It was so worth it!

If I thought I had to take this on because I needed the money, my fear of public speaking would have been more than a bit paralyzing.  I would have resented the amount of time it took to prepare–especially because I spent way more time on this than I could bill.  Since it was a choice, I could focus on my excitement.

Not needing the money transformed the way I thought about the entire situation.

There are more benefits to being financially independent than I ever expected. 

I expected my financial independence would mean I could replace work with fun activities.  And, yes, I have.

I didn’t really think about being able to pick and choose money-making opportunities based on whether I thought they would be fun.

Last week was a perfect example.  Hanging out with my old friends, making some new friends and being able to contribute again was a rush.  Having people thank me and tell me how they would use what they learned to improve their processes was incredibly rewarding.

Oh and at least one of them wants to hire me to help them one on one.  That sounds fun, so I’ll do it!

But even before I quit my job, my financial independence paid dividends.  My boss was doing everything he could to keep me around.  This gave me a lot more control–I took advantage of it by working from our desert home as much as I felt comfortable.

So I’d say whether you want to retire early or not, save your money.  Save a lot of money.  Save as if you were pursuing financial independence.  The rewards go beyond the ability to replace work with fun–and that’s pretty awesome on its own!

Introducing the FIRE Prowess Score

Once again, I’m adding a link to a blogging chain.

The last chain was a series of articles about drawdown strategies.  A group of bloggers detailed out how they expected to support themselves when their paychecks stopped.  It was a fun exercise and it forced me to get more specific about where my money will come from in different market conditions.

The latest chain is a new way to assess our efficiency at reaching financial independence.  The FIRE (Financial Independence/Retire Early) Prowess Score was developed by JW, the 30 something behind The Green Swan, it goes like this:

FIRE Prowess Score= Change in Net Worth / Total Gross Income

His goal was to develop a measurement that worked across all income levels so geeky bloggers (watch me raise my hand!) could compare themselves on an even playing field.  The typical measurement we’ve used is savings rates.

The downfall of savings rates is that it’s easier to save 75% of your income if you make $500,000 a year than if you make $50,000 a year.  The savings rate super heroes in this space are often doctors.

I love that this is called a prowess score.  Prowess means skill or expertise in a particular field.  Yep that makes sense.  But it also means bravery or courage–and I think it truly takes some courage to rock this FIRE Prowess Score.  You have to live differently than those around you.  You have to focus your limited resources on things that matter to you and ignore the things that don’t.  That takes some courage for sure.

OK so how does it work?  Let’s say you are calculating your FIRE Prowess Score for the last 5 years:

-Add your income for those five years–I got my historic income from SSA.gov
-Take your current net worth and subtract your net worth from 5 years ago
-Divide your change in net worth into your total income
=And you have your FIRE Prowess Score

Here’s an example:

5 year increase in net worth: $100,000
/ Income 5 years @ 75,000/year = $375,000
=FIRE Prowess score of .27

JW gave us descriptions for the different score levels so we can pat ourselves on the back or berate ourselves to do better:

If over the last 5 years your FIRE Prowess is:

  • Negative or 0.0x – Not even on the path toward retirement, let alone FIRE. If you aren’t saving and investing any money and your net worth isn’t growing then it is time to make some changes and develop positive financial habits. It may be a change to a frugal lifestyle or getting an advance degree to take the next step in your career.
  • 0.0x to 0.25x – You’re conscious of your retirement and know you should plan for it, but early retirement may not be on your radar at this point.
  • .25x to 0.50x – You’ve got the ball rolling and you’re certainly trying! Keep investing wisely, perhaps add a side-hustle or few lifestyle tweaks to lower expenses and FIRE can be within your grasp.
  • .50x to 0.75x – You’re working hard toward your retirement goals! Early retirement is definitely possible. Keep working hard and that investment snowball will be rolling (compounding) in no time!
  • .75x to 1.0x – FIRE is on your mind and you are performing in overdrive right now!
  • 1.0x and over – You are killing it! Don’t make any stupid mistakes and FIRE will be within your grasp in no time. In this scenario, your net worth is more than your lifetime earnings which Joe at Retire By 40 recently wrote about. This is certainly a tough milestone to reach, but maybe one day I can make this claim!

OK so drum roll please . . . here are my scores:

2016:  2.79 off the charts!
5 Years 2012-2016:  1.34  I’m killing it!
10 Years 2007-2016:  .89  not too shabby!
Post College:  .72  it took me some time to get this FIRE thing going.
Worst Year:  -1.34 in 2008 when my net worth shrunk 16%

How did I rock it so much in 2016 you may ask?  I quit my freaking job!  I had a full year of growth in net worth against a bit more than half a year of income.  We may need to come up with a different scoring system for those at the end of their accumulation phase (that’s just a nice way to say older folks).

As long as the stock market cooperates, I’m really going to rock it this year.  My net worth continues to grow and my income is almost non existent.  So far my FIRE Prowess Score is 20.97 for 2017.  Oh shucks, JW said this score doesn’t work for folks who aren’t working . . .

I think JW’s descriptions are spot on.  I would say over my lifetime I’ve been focused on saving for retirement but I didn’t put my savings into overdrive until my last 10 working years.  I also made some investing mistakes early on–thinking I was some sort of Warrenita Buffett rather than just shoveling money into a S&P 500 index fund.

Check out the other bloggers’ scores in the chain:

Calculate your FIRE Prowess Score whether you’re pursuing early retirement or not.

What can you do to improve it?  Save more of your income and invest it smarter–show your prowess!

Your Retirement Questions Answered

When people find out I write a financial independence/early retirement blog, they sometimes take a breath and start peppering me with questions.  I thought it may be helpful to y’all if I answer the questions I get asked most often.

How much should I contribute to my retirement?

If you want to retire at a typical age then 15% of your gross salary before taxes and benefits.  This 15% can include your company match.

At my last job, the company matched 25% of my contributions up to 6% of my salary so that worked out to a 1.5% total match.  If I wanted to retire around my full retirement age for Social Security, then I should have contributed 13.5% of my money.

If you want to retire early, you should be contributing 15% to your retirement and saving outside of your retirement accounts as well.  How much depends on your expenses and risk profile.  Run a few calculators, or build a spreadsheet and figure it out.  Here’s a calculator from Vanguard.

What if I started late or don’t have much saved now? Continue reading “Your Retirement Questions Answered”

How I’ll Fund My Retirement

Many of the financial bloggers I follow are pursuing financial independence.  Not many of them are already there.  So there isn’t much information about how to fund your life once you are retired.

My fellow blogger, Fritz, at RetirementManifesto decided to correct that by creating a chain of articles discussing drawdown strategies.

I decided to join in the fun and lay out my draw down strategy.

I don’t have a pension.  I am counting on Social Security though I’ve reduced my expected payments by 30% because something has to change with Social Security, right?  At 52, with a husband in his 60’s (sorry Mr. Ms. Liz!) I feel secure in counting on this.

Curious about how I got here?  Here’s my savings rate and net worth growth.

First, a couple snapshots on where I am now.  I’m following Fritz’s lead on format. Continue reading “How I’ll Fund My Retirement”

How Much Is Enough?

When you get to your 50’s and 60’s, thoughts turn to retirement.

Since we’re among the first of our friends to take the leap, we’re having a bunch of fun conversations.  Friends are trying to figure out when they can join us.

Mr. Ms. Liz tells them to do it sooner than later.

My friends think I’m crazy but one of the big reasons I retired early is that Mr. Ms. Liz’s Mom died at 64.  Mr. Ms. Liz just turned 61.

If he were to follow in his Mom’s footsteps, we have three more years.  There are a slew of reasons why this won’t happen (smoker, non-exerciser, poor eater etc.) but it was on my mind.  If we have three more years, I want them to be three years focused on FUN, not three years focused on work.  And we were ready–financially and emotionally.

You don’t know how many good years you have left.  We know few people who have a great quality of life after 75.  So we say make it happen sooner if you can. Continue reading “How Much Is Enough?”

Save To Retire Early Even If You Won’t

I listened to a good bit of the James Comey hearing last week.  I don’t follow politics closely but Mr. Ms. Liz does so it was on the TV while I was working.

I kept wondering–does he have F U money?

We haven’t talked about F U money before because I find it to be a bit vulgar and I know some of my readers are sensitive to such things.  But I haven’t found a better way to express this concept.

Jim Collins, one of my personal finance heroes, coined the term.  If you haven’t read his stock series yet, do it right after you finish this insightful post :).

Does James Comey have enough money to move on to something else without worrying about how he will keep his family afloat during the interim?  He’s 56, could he retire? Continue reading “Save To Retire Early Even If You Won’t”

Reflections On My First Year of Retirement

I’ve been retired a year–it’s crazy how fast it has gone!  It makes me better understand a line Gretchen Rubin often quotes “The days are long but the years are short”.

I hope you’re not disappointed but I’m not issuing a report card like I did for my first four months of retirement.

Mainly because my grade would go down and I’m a gold star junkie.

Not because I’m not loving this retirement thing but because retirement has turned into more of a vacation than something I can grade myself on.

I feel like this first year has been a detox.

I’ve allowed myself to be far less productive than I expected I would. Continue reading “Reflections On My First Year of Retirement”

What Could You Do With A Million Dollars?

On the Stacking Benjamins Podcast I was listening to today, Joe was talking about the responses he received when he asked his Twitter followers what they would do with a million dollars.

He got some interesting responses.  Some were altruistic–donating the money or helping family members.  Some were realistic–like paying off debt.  And some were funny–like calculating the time it would take to count the money at the bank–in twenties.

It got me thinking.  What could each of us do with a million dollars?

I’m overly rational so I got out the calculator.  $1,000,000 invested should provide $40,000 of retirement income forever.  With Social Security providing 40% of our needs (as it does for the average recipient), we should have a stream of income of about $67,000 in retirement.  I could live a pretty nice life on $67,000.

That $1,000,000 invested in rental real estate should provide even more income.  According to Paula at affordanything.com, we shouldn’t invest in a property unless it will rent for 12% of the purchase costs per year, 6% of that goes to costs and that leaves 6% return for us.  Our retiree now has an annual stream of income of $100,000 including Social Security.

Now we’re talkin’!  With that income, we could do some really cool altruistic stuff too! Continue reading “What Could You Do With A Million Dollars?”

Yikes–I Went Back To Work!

Almost universally, when I talk about being retired, people say “but you’ll go back to work someday–right?”  I’ve been asking some close friends about this.  Why are people trying so hard to un-retire me?  Are people more comfortable with me if I have a lifestyle similar to theirs?  Well, I guess I’m going to make those folks a bit more comfortable.

I’m adding a word to my title–I’m now Semi-Retired.  I’m an accidental Semi-Retiree.

I guess I’ve been a Semi-Retiree since I started this blog in July.  The blog is work–right?  But I made $20 on the blog last year, and I spent over $3,000.  Most of it was to attend a financial bloggers conference (yep, that exists).  But over $600 was for hosting and software.  So I guess this blog is the worst part-time job ever–but I love it.  And my readership is growing and someday it may make a few dollars (in case the IRS is reading this). Continue reading “Yikes–I Went Back To Work!”