Retirement Social Security: Should I Withdraw Social Security at 62 or 67 with $1 Million?

 

Withdrawing at the Right Age:

Troy Sharpe: You’re getting close to retirement. The question is, when should you take social security? Should you take it at 62? Should you take it at 67?

It’s like the old chicken and the egg discussion, which came first. Well, in this video I’m going to show you some circumstances where it might make sense for you to take it at 62, but I’m also going to show you why it might make sense to wait until 67.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner, professional host of the Retirement Income Show, and also a certified tax specialist. When it comes to social security, there are usually two types of people we come across. The first one says, “Troy, when I retire, no matter what, I’m taking Social Security,” and the other truly have questions.

When does it make sense? Should I defer social security longer I’ve heard that that makes a lot of sense?

Well, the truth of the matter is your circumstances, your individual circumstances dictate when you should take Social Security, and those circumstances today may very well be different when you get to be Social Security age.

I want to cover some of those situations that may change your timing when you select Social Security. I also want you to know how that impacts you long-term as far as your financial security, how much money you have, and how much income you have.

Before we continue, if you like to support the channel, just hit that subscribe button, share this video with a friend or family member, or comment down below. Let’s take a look at John and Jane. They’re both 61. They come in, they say, ”Troy, you know what? We’re tired of working, we really are thinking about retiring and we know we can take Social Security next year at 62, does that make sense?” ”Should we do that?”

This is a case study, but John and Jane right now both make about $75,000 per year. The first thing we’re going to do is look at can John and Jane retire at age 62. Now, we have to pick a mortality date here. We start in this example at age 90. Now, one spouse could pass away before another spouse. We can always move these sliders back and forth and that would impact the probabilities and the right choice for taking Social Security but for now, we’re going to plug these in. Both spouses live until age 90.

Can they retire at age 62?

We have to look at some goals here too because the decision of when to take social security should not be made in a vacuum. Just because you get more from Social Security, if you defer it longer, does not mean that you should always simply defer social security
longer. There are some big things we need to understand.

First, when do you want to retire? How long are you going to live? How many assets have you accumulated? How much money do you have? How much do you want to spend in retirement?

That is a big determinant of how long your money will last, and also when you should take Social Security. We have to first and foremost realize that the decision of when we elect Social Security, each spouse has to be made within the context of the other parameters within retirement.

The first big takeaway here is in order to determine at what age you should elect to start Social Security, we have to do that in the context of what age are we going to retire. How long do we think we’re going to live? How much money do we want to spend in retirement? Especially the first 10 years when we’re younger and healthier. Then also, how much money have we saved up to this point?

Now, for John and Jane here, they want to spend a baseline income of about $50,000 per year, but they’re healthy and they’re active, and they’re retiring young. The target date here is 62. They want to spend an additional 60,000 on what we call the go-go years, so a total of $110,000 for the first 10 years of retirement. From 62 to 72, after that 10th year, they want to reduce the spending, but they’re still planning on being a little bit active, going out to eat, spending time with friends, probably kids, grandkids, et cetera.

They’re going to reduce the total spending from the go-go of 60 to 25, so 50 plus 25 to $75,000, all adjusted for inflation for another eight years here. I’m just going to randomly put some numbers in of what we usually see when we sit with clients when we go through the income planning discussion and what retirement success looks like to you.

This is something common to what we may see in this situation. $110,000 for the first 10 years of retirement, then $75,000 for years, 12 through 20, and then all of that goes away except the baseline spending of about $50,000 a year. Of course, that’s adjusted upwards for inflation.

20 years from now, that’s going to be close to about a hundred thousand in today’s dollars as far as the purchasing power of that 50.

Now, I like to start the analysis at age 67. Full retirement age. When we start to look at these parameters of when it makes sense, the baseline I like to start at is 67.

In this scenario, John has $36,000 or $3000 a month at the full retirement age of 67. If he waits that long, Jane will have $30,000 in retirement benefits at full retirement age.

We call it FRA for short if she waits until age 67. Okay. I told you there were four big things there.

We’ve already covered two of them. How long do they expect to live, age 90? How much do they want to spend? We went through that go-go spending plan. Now, how much have they saved?

 

 

Because these are the things that we have to look at in the context of making the decision of what makes the most sense regarding the age to start Social Security for both spouses. In this example, we have 250,000 inside Jane’s
401(k).

John has about 700,000 inside his 401(k) and they’ve managed to save about $50,000 outside of retirement accounts for a total investible asset level of 1 million bucks. Now, I like to point this out as well. They have a $500,000 home, and no mortgage. That’s always in our back pocket if we need to tap that home equity line, possibly a reverse mortgage, or if we want to sell and downsize, generate a little additional cash for the investment portfolio or to spend, it’s always nice to know that we have that option.

Remember I said I like to start the social security analysis when deciding between taking it a 62 or 67, or anytime in between or even later. I like to start the baseline at 67 to see where we are and how everything plays out. I’m going to hit the magic button and based on the go-go spending period retiring at 61, taking Social Security at 67, and having $1 million in assets, by the way, not assuming that the home is sold, we just know that’s in our back pocket, but it’s not used to fund any goals.

Couple of things I want to point out here. First, 81% probability of success. That means out of a thousand different simulations, assuming all these different market returns across all these years. I want to also point out that this is not using back-tested data. This is using assumptions and forecasts moving forward for the current economic environment. That’s very important to understand. 81% is not 100% but is it good enough to retire? Yes, absolutely.

As long as we stayed connected to what was going on in our plan as far as how our portfolio is doing, how much income we were spending, the economic environment, and all of these various factors we would just want to monitor it a bit more closely to make sure that we weren’t going down from 81. The second thing I want to point out here is to look at the trajectory. There are a thousand different simulations here, and the thing that sticks out to me is taking social security at 67 and spending that amount of money we see in literally all of these simulations that the portfolio balance, this is what this represents.

We’re starting at a million on the Y-axis here. You see it’s 2 million, 3 million, and then on the X-axis, it’s going out years 2025, 2030, 2035. almost all of these simulations the account balances are depreciating.

That tells me immediately that I want to have a conversation with you that if we defer social security until 67, would you be comfortable seeing your account balances spend down? Because for my experience, when people’s account balances are spending down in retirement, even though they know they have a much higher guaranteed income from social security, people get nervous.

When you get nervous in retirement, especially during a recession you can make bad decisions.

Bad decisions are typically the one thing that can really throw your retirement off track. If we allow our emotions to dictate our actions, we can blow an entire plan up and the best plant out there will get blown up from bad decisions, typically driven by emotional feelings, behaviors, et cetera.

Now we’re going to take a look at Social security at 62 versus age 67, and we’re also going to look at age 70. What we have up here is full retirement age, both taking it at 62, both taking it at 70, and then one spouse at 70, one spouse at 67.

We’re going to look at the probability nothing’s changed except when we take social security. What we just looked at, is the current 82%, the reason this is 1% higher than the 81 is another simulation has run, but we’re right in that
range. I want to point this out here.

This is interesting, the age 62 of both spouses takes at 62, it’s very, very close to the full retirement age probability. When we’re doing a statistical analysis of all these different variables, to me there’s not a ton of difference between 79% and 82, 81, somewhere in that range. These are very, very similar. Now, when we look over here at age 70, this is the one I want you to really let soak in and understand why. We have a couple that wants to retire early, but they also have a pretty big spending goal in mind because they want to enjoy retirement, they want to spend it together, they want to travel, and spend time with the kids. That 110, I think was the goal, 110,000 during that first 10 years of retirement in the go-go years.

This means we do have to draw down the assets. We need to be comfortable with that, but we also need a plan on where that income is coming from, and how we’re going to protect some of the assets, but also we want to make sure that these other decisions are being made correctly as well. So 62 and 67, are very similar. If they were to just follow the most recent article they read on CNBC that says you should defer your social security as long as possible, and they waited until age 70.

Yes, they would have significantly higher annual income, but they will have spent down the portfolio to such an extent that might be all they have. The big difference here is between taking it at 70 versus 62 or 67. Now your situation is completely different. I’m not telling you to not take it at 70 because for a whole lot of our clients that is the right thing to do mathematically. The other side of that coin is mathematically not always the right answer. Working with clients for many years I know that emotionally if we put a plan together, this is a conversation we’d have with you.

If we put a plan together that had you deferring Social Security longer, but your account balances were declining in value not because the market was going down just because you were spending. From my experience, that would be very difficult for a lot of people to continue to spend the amount of money that they have been spending and still feel comfortable that they’re going to be okay in the long run. This is why staying connected to the plan and having ongoing conversations and making sure you’re attending your reviews and making sure that you understand where you’re at.

I also want to briefly just talk about the dynamic spending concept. Things change in retirement, things change in the markets, and things change in the economy. When we’re having these types of discussions, if we’re not comfortable, you have to communicate that because we can pivot, we can go in a different direction. Just understand that all of this, think of your retirement plan as a living, breathing organism, and the decisions you make, every single decision you make impacts your long-term security.

For some of you, it may make sense to take it at 62. For some of you, it may make sense to take it at age 67 and others at age 70. For some of you, it may make sense to take it at age 62. For some of you, it may make sense to take it at age 67, and others at age 70, but make sure you understand that this plan of yours, is a living, breathing organism. It needs water, it needs sunlight, it needs to be paid attention to and things are going to change.

Pay attention to your emotions, and how you’re really feeling about your account balances. Is that impacting your spending decisions? Are you having trouble sleeping at night? If so, that’s a conversation that you need to have with your advisor, but all of these different pieces working together, from my experience, that’s how you have a higher probability of success in retirement and also sleep better at night.