The call from Sandra, a Registered Nurse, came in on my cell phone. The cliff notes version of the conversation was essentially ? ?-Armando, I am 62, still in the work force: I?m tired, have been working all my life and have paid into the system for 46 years. I want to get my Social Security pension early since I don?t know what the future holds?-
Though it may be real tempting to take that guaranteed income, is the ?take the money now? approach the best alternative for you to take? Let?s look at several factors facing her and the case?s outcome.
Factor # 1: Longevity– Let?s face it. Longevity risk, the risk of living too long and outliving our money, is an all-too-real scenario and the greatest risk we all face, specifically for baby boomers. Since half of all 65-year-olds will live longer than the average life expectancy, effective retirement planning must account for 25 to 30 years beyond expectancy.
In Sandra?s case, her Full Retirement Age (FRA) is age 66 and 6 month. If she decided to take benefits at 62, she would receive $1,450 a month which translates in a 30% reduction in monthly benefits. If she waited to take benefits at her FRA, her monthly Social Security benefit would be around $2,000.
However, if she waited until age 70 to file, her monthly Social Security income would be $2,560, an increase of more than 76% in monthly benefits. This translates to an increase of her lifetime benefits of no less than 24%.
Let?s think this out clearly. Every year that we delay taking Social Security income translates to a 7.36 to 8% increase in benefits. Since the FRA now ranges between 66 and 67 years of age, no longer 65, the annual cost-of-living adjustment (COLA) is another important factor to consider. If she decided to claim benefits at 62, not only would she start with reduced benefits, but her COLA-adjusted benefits would also be lower. Things that make you go ?Hmm?.
Factor # 2: Retirement Lifestyle ? According to the latest revamped mortality tables from the Society of Actuaries based on data collected for 2010-2014, a 65-year-old female?s average life expectancy is 88 years: 85 for a 65-year-old male. In her case, I totally understood her WHY- her reasons for taking an early retirement. However, at 62, her nurse position?s current earnings, investment ability and benefits are at the upper end of her lifetime earnings trajectory. Her retirement nest egg was not sufficient enough to fund 15 or 20 + years of retirement.
To stop working full-time at age 62, take a reduction in Social Security income and not having another source of income to supplement it and her retirement assets would leave her with fewer if not scant financial options by the time she reached her 80?s. Even if she would be healthy enough to return to work at a later time, her ability to regain her current level of compensation would be seriously limited. Here?s a caveat to consider: Every day is Saturday in retirement.
Factor # 3: Current and future healthcare costs ? While she does have the opportunity to take reduced Social Security benefits at 62, she doesn?t qualify for Medicare until age 65. Since she is physically and mentally healthy, she doesn?t qualify for Medicare Disability benefits either so giving up her current group health benefits at work would force her to seek and pay for private individual health insurance in the meantime. The current cost for said individual health insurance on average for a 55-to-64-year-old individual in Florida runs between $1,100 and $1,300 per month with annual Out-of-Pocket costs as much as $6,000 per individual. While every person and case are different, taking an early payout would result in a permanent Social Security income reduction of $1,100 a month between the age 62 and 70. If we factor that income reduction plus the annual cost of private health insurance until her Medicare eligibility at age 65, she would be looking at an out-of-pocket outlay of $79,200 in the next 3 years. Using a conservative 5% cost of money rate, the actual out-of-pocket expense would be $87,387.
As advisors, we need to engage clients by asking them about what they?re thinking about and where they are in life. Our job is to help them bring substance to their thoughts which ultimately allows us to help them plan better in both a financial sense and in a more practical lifestyle sense. Long Term illness, reduced mobility and cognitive decline are some of the areas that could impact their financial decision-making as they age, these being key reasons why advisors need to meet annually with clients and end each appointment with another appointment.
Assisting Sandra in understanding What she needed to spend money on- the basic and unavoidable expenses she would be incurring during her early planned retirement and determining the annual income need to cover them: Health Care, Housing, Transportation, Food, Debt and Personal Spending, was the first step in her Retirement Planning.
The second step was to assist her in understanding How taking an early Social Security income payout would affect How she wanted to spend the rest of her money in retirement. How would a reduction in income stream affect her plans to enjoy:
- Investment opportunities
- Philanthropic goals
- And Legacy planning
What she expected from her nest egg, including her social security income, also allowed her to see that although she may have been aware of how much money she would have in retirement, she did not know how much income she could expect from that money. She learned that Longevity and Withdrawal are two of the biggest risks during retirement.
Helping her through this process gave her the peace of mind to understand her priorities that ultimately assisted her in making the financial decision that was right for her mindset, in a holistic manner that was specific to her. Advice Lewis Carroll would be proud of.