“Since I had already estimated my likely longevity at 84 to 86, waiting would have been a poor financial decision.” (Photo subject is a model.) – Getty Images/iStockphoto Dear Quentin,
I just read your answer to the reader about his Social Security benefits (“I always did the graveyard shift: I worked for 54 years. Why on earth would I wait to claim Social Security at 70?”). It was a nuanced response. Too often, Social Security advice defaults to black-and-white answers, when in reality it’s almost always a gray, highly individual situation.
I understand the challenge of writing advice columns. The truth is, optimizing Social Security decisions requires forward thinking and a willingness to confront uncomfortable questions about longevity. By and large, I don’t think most Americans are inclined toward that kind of structured, critical thinking about money and mortality.
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Many also lack the quantitative skills needed to work through the analysis. I nearly made a major misstep myself. I was so focused on waiting until full retirement age or even age 70 that I overlooked other aspects. Just before turning 64, I realized that my teenage daughter would be eligible to receive two-thirds of my benefit for five years, until she turned 18.
Social Security’s role in retirement
Once I factored that in, the break-even age for claiming at 64 shifted from just over 80 to about 86. Since I had already estimated my likely longevity at 84 to 86, waiting would have been a poor financial decision. Even then, there was more nuance. We were fortunate not to need the income when I was 64.
That raised another question about when I should claim my Social Security: Might I need a larger Social Security check later in retirement? Answering that required a clear understanding of our long-term financial outlook, including our savings and investment strategy, which are both substantial and relatively aggressive.
Projecting our cash flows out to age 90 for me and 100 for my wife — who is 10 years younger — made it clear that Social Security would account for only 20% of our income, even under conservative assumptions. In my view, that made the money more valuable now than later. I have many well-educated, capable friends, and only one has done this level of analysis.
A friend’s million-dollar mistake
This friend only did so after I showed him how his lack of attention during his peak earning years had cost him millions. It’s remarkable — and discouraging — how many people are disengaged from their own financial lives. On the bright side, that probably means you’ll never be short of clients in the advisory world.
By the way, we spent very little of my daughter’s Social Security benefit on her day-to-day needs. Most of it went into her 529 college plan. After her first full year at the University of Minnesota (costing about $56,000 net per year), she still has $313,000 in the 529 — enough to cover the rest of her undergraduate education and likely two years of graduate school.
I also plan to ensure she has at least $35,000 available to roll into a Roth IRA once her college education is complete so we can keep that investment journey going. Apologies for the brief brag, but I gave up quite a few racetrack days at Watkins Glen to make that happen — so it feels like a hard-earned win.
Retired at 64
Optimizing Social Security decisions requires forward thinking and a willingness to confront uncomfortable questions about longevity. – MarketWatch illustration Dear Retired,
You’re a double winner with Social Security.
Because your daughter did not need to use her dependent’s benefits for day-to-day activities, you were able to invest them to great effect. As you say, sometimes the choices we make are due to paying a little extra attention to risk, reward and real life. The combination can lead to some big returns — or to losses, if we take a wrong turn.
Your decision to take Social Security is a deeply personal and well-thought-out one. The fact that your daughter received two-thirds of your Social Security benefits for five years tipped the scales for you. Frankly, it’s hard for any of us to look at our own health and family history and make the call that perhaps our estimated death date will come sooner than we would like.
Your decision was also influenced by the fact that your Social Security benefits will only account for 20% of your income. Lest we forget: Social Security is not an investment vehicle — except for your daughter, that is — it’s an insurance policy against living longer, in the same way that Medicare is an insurance against illness in old age.
The importance of being vigilant
The takeaway from your letter — and the lesson for readers — is that it’s important to be vigilant. Whether it’s about making the decision to claim Social Security at 64 or 70, even though we know the benefits could be anywhere from 24% to 30% higher if we waited until 70, or about starting our investing journey early, like your daughter, it’s a case of see something, do something.
You are obviously a mentor to your daughter and even to your friends, and I have no doubt there are people you have learned from, too. If it is a tragedy that someone reaches retirement age and relies solely on Social Security, having very few other assets and having to struggle in their 60s like they did in their 20s, it’s that they did not believe that investing is for people like them.
We are all influenced by our friends, family and even our neighbors. There are multiple studies examining the concept of “economic connectedness” and the impact that an affluent, influential or educated and savvy social network can have on our financial lives, with some studies predicting that it can lead to a boost in income of up to 20%.
I’m reminded of this couple who took advice from their neighbors, who hooked them up with a smart financial adviser. Unfortunately, their neighbors did not take the advice of the aforementioned adviser and continued to splurge on extravagant vacations and drive around in the latest-model car. When the frugal couple retired early, the relationship broke down.
There is no ‘wrong’ question
There are so many factors that go into the choices we make when we approach adulthood, whether it’s working to be the first person in your family to go to college or getting on the property ladder at a young age or aiming for a professional job, and yet sometimes investing takes a back seat — often but not always due to circumstances.
And, yes, there are many objectives that I hope this column fulfilled over the last decade, and continues to do so. Among them: provide perspective to the person who writes a letter, to affirm that I have actually listened to their question — especially for people who feel they are alone — and finally, to give context and food for thought to other readers.
Sometimes, the letter writer may be asking the wrong question about the right problem, or they could be ignoring the elephant in the room. Recently, I received a letter from a reader about whether she and her husband should add their children as beneficiaries to the husband’s modest retirement fund. The answer was no, but it raised other imminent estate-planning questions.
Like you, I’d like us all to be winners, too.
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