Saturday, November 19, 2011

Dip Into Savings or Collect Social Security?

 Does Marketplace give good financial advice to people?  I think their advice is too off-the-cuff and generalized and possibly dangerous.  Each person's situation is different and blanket panaceas are not valuable answers.

I was listening to Marketplace on American Public Media today while driving and when I heard advice they gave to a caller, I nearly drove into a tree.

The lady calling was older, eligible to collect Social Security, but had lost her job (hello, why isn't she it a position to retire?).  She is burning through $1000 to $1500 a month from her savings ($12,000 to $18,000 a year) and wonders if she should collect Social Security now, or continue burning up her savings.

The stellar advice they gave was to "wait" until 70 to collect Social Security, as you "get more."  I disagree.

As I noted in an earlier posting, there are many good reasons to collect Social Security early, including the fact that every day you wait, is a day Congress can pass new legislation cutting your benefits or moving the retirement age further out.  A bird in the hand, as they say.  And as I noted in that posting, in terms of present value of money, the stream you collect at age 63 or 65 or whatever, will exceed the value you get if you start at 70, unless you live to be 85 or so, and even then, the difference is not that great.

Waiting until you are 70 to collect Social Security is not always good advice.  A friend of mine who is an Accountant did the math on this, and in most cases, if you collect early, put that money in the bank and collect interest, the payout is about the same, over time.  In order to come out ahead by waiting until age 70, you have to live well into your late 80's.  Bear in mind that the average person lives to about age 76-78 in this country.

My accountant friend also pointed out that if you wait until age 70, there is every change that Congress may raise the retirement age to 70 before you get there.  As a result, the wait may not be worth it.

It is a personal decision, and one factor to take into consideration is your personal health and life expectancy.  Waiting until age 70 is not always the best answer.

Compounding this was the fact the caller is spending $1000-$1500 a month in savings (I am guessing close to the latter).  I think you would really have to sit down with a calculator, and do the math on the future value of money, vis-a-vis the social security payout, versus the lost revenue from cashing in savings (not to mention the loss of the savings security reservoir).

Also, you did not ask the caller about their current lifestyle and whether that could affect their current situation.  I know people who are "unemployed" but paying $100 a month for cable and another $100 a month for their smart phone.  Has this lady explored ways to cut expenses before dipping into savings?

The job market outlook is not very good now.  And there is every possibility this lady might never work again - it happens.

I otherwise enjoy your show.  But I think blanket prescriptions, such as "wait until 70 to collect Social Security" are not always sound financial advice.

I am not sure how much the caller can collect for Social Security, but I know that for my Social Security Account, my income was projected as follows (taking the projections from the Social Security Administration with a grain of salt):

  • Age 62 - Age 80: (216 months) @ 1463/mo = $316,008
  • Age 67 - Age 80: (156 months) @ 2085/mo = $325,260
  • Age 70 - Age 80: (120 months) @ 2586/mo = $310,320
If we assume $18,000 a year taken out of retirement, in lieu of Social Security,  we are talking about $144,400 in devastated savings, between ages 62-70.  From 67-70, the number is only $54,000.  However, using the 4% rule, that savings could easily generate incomes of $5760 a year or $2160 a year, respectively.  This partially makes up for the difference of $19,071 or $6,012 that you would see at retirement.

But that does not take into account the lost interest on savings, which at a rate of 5-10% could be about $7500 to $15,000 from age 62 to 70 or  $2500 to $5500 from ages 67 to 70.

In addition, there is one more thing:  If you burn through all your savings, trying to "save" your Social Security for later, you end up with no savings later on.  It will be darn hard to restore $1500 a month in savings from eventual collection of Social Security at age 70, assuming Social security is only $2500 a month or so.

So, it is not an easy answer, I think.  And compounding the problem is that the caller was convinced that this recession thing would end shortly, and in their mid-60's they could find a good paying job and restore their savings.  This could be an utter fantasy.  Many people laid off in their 50's and 60's never work again, or work at low-paying service jobs.  And there are hordes of young people out there more than willing to take those low-paying service jobs.

Social Security was designed to move older workers out of the workforce so that younger people could find work.  It seems counter-intuitive to tell someone who is out of work to "wait" for age 70 and burn through their retirement money in the interim.

I strongly suspect the caller will eventually ignore their advice, out of necessity, and collect Social Security, once they have run out of savings.  And at that point, they will wish they collected earlier, learned to live on less, and had some money in the bank.  Living on Social Security is hard.  Living on Social Security and NO SAVINGS is even harder.

Blanket proscriptions are not the answer.  Doing the math, I think would be more instructive.  But on a simple call-in show, they don't have time for that.