- In this video, we discussed why more people
file for social security at age 62 than at any other age.
Coming up next on Holy Schmidt.
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- Holy Schmidt.
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- According to Social Security Administration in 2021,
29% of filers filed for Social security at age 62.
This was followed by 24.7% of filers at age 66,
which would've been full retirement age in 2021.
And then the balance at age 70 represented 9.7%.
And of course, along the way there were others as well,
but the three big points are those
that we commonly think about.
This was all published in a report
by the Congressional Research Service in July of 2022
called The Social Security Retirement Age.
So it's quite current.
For those of you who are interested in the report,
I'll put a link in the description.
I'll also remind you at the end
so that you don't need to stop the video now.
If you look at straight math,
which includes actuarial tables, the vast majority of people
should file at age 70 if they want to maximize
their social security benefit.
The payment is over 50% higher at age 70 versus age 62.
Plus, on top of that, the recipient gets
the cost of living adjustments on that payment
regardless of whether they file at age 62 or age 70
so it can end up being a very large number.
So if this is the case, why do three times as many people
file at age 62 versus age 70?
Do they know something that others don't?
Before we answer this question,
let me note that you as a group of viewers of this video,
are quite unique.
For the most part, those approaching Social Security
don't take the time to watch a video on YouTube
about the right age to file for Social Security.
If you're watching this video right now,
this probably isn't you,
but just know that there is a not so small group of people
that don't know the difference
between what the payment will be at age 62 and age 67.
Now that I got that outta the way,
let's talk about those who know how Social security works,
and still they make the decision
to claim Social security at age 62.
We're gonna lead with the top reason,
and we're gonna end with the second largest reason,
and then we're gonna have several in between.
But the number one reason is health.
Let me explain.
This group of people say,
"That if they were to depart the world tomorrow,
they will have contributed a lot to Social security,
receive nothing back, and depart the earth penniless."
That was a direct quote.
Now to be super clear,
if you have a serious health condition
and you are able to quantify
the number of years you have ahead of you,
this strategy makes a lot of sense.
But that's not what most people say.
Most people talk about family history.
Their brother passed away, their older brother passed away,
their older sister passed away,
one or both parents passed away at a young age.
Therefore, they may pass away early as well.
If there's a health condition attached to this,
again, it might make a lot of sense.
If it's just a general feeling that you have
because it happened to others so it could happen to you,
let's chat about this a little bit more.
Basically, there are two thoughts and only two thoughts
on how Social Security works for the recipient.
One is what I call the investment thought,
the other is what I call the insurance thought.
The group that looks at Social Security as an investment
looks at recouping their investment.
They think about it somewhat like a defined benefit plan.
They know that they're going to receive
a very specific payment every single month
for the rest of their life, and so therefore,
they wanna make sure that they get back
as much of their original investment as possible
before they depart.
The second group, the insurance group,
look at Social Security as a safety net for later in life.
In fact, they think about what happens not when they're 60,
65, 70, or even 75.
They think about life at age 80, 85, or 90,
and how they're going to afford life at that point in time.
If they put a burden on someone else, for example,
this is a big consideration for them at that age.
And while no one can know for sure
when they're going to pass, there was an experiment
that was done in 2015, and two groups of individuals
that were thinking about retirement,
two test groups were put together,
test group A and test group B,
and they were asked essentially the same question
but two words were changed.
Test group A was asked to list the reasons
why they might want to take Social Security
earlier rather than later
when presented with the opportunity.
Test group B was asked why they might want
to take Social Security later rather than earlier
when presented with the opportunity to make a choice.
Once those two groups were asked the question
with a slight change in the wording,
they were asked a second question.
And that second question was,
what do you personally think you will do
when it comes to filing for social security?
Those that were part of test group one
chose to file for Social Security 9.4 months earlier
than those that were part of test group two.
Interesting.
The next point is a job related reason for filing early.
In summary, those that don't like their job
want to file earlier than those that like their job,
or don't dislike their job at least.
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It's a bit like early parole for some people,
maybe not you, but for some people
it's a get out of jail free card.
They usually adopt the narrative
with overly ambitious younger workers,
toxic work environment,
or a change of direction in the company,
but the bottom line is that they hate their job.
By the way, if this is you and you don't like your job,
know that you always have
a filing for social security as an option,
but you only have a certain number of work years left.
So maybe the better approach is to just switch jobs.
The fact is, if you file for social security,
unless you're unique and you've taken
a big pay drop in your current role,
the amount you receive from Social Security
won't be nearly as much as you're receiving from work.
So your actual spending power in retirement goes down.
So much so that you can actually afford
to get a lower paying job, a significantly lower paying job,
and still come out ahead
while letting your social security grow.
But, and this is a big one, make sure you understand
your company's deferred compensation rules,
and your pension rules so that
if you go to work for another employer,
particularly a competitor, but oftentimes any employer,
you don't lose benefits that would be entitled to you
if you simply retired.
The next is coordination of spousal and child benefits.
If you are receiving a spousal benefit,
this is called the secondary benefit to the primary insured.
The same thing with the child benefit.
Unfortunately, both the spousal and the child benefit
are dependent on the primary insured going first.
This presents an interesting dilemma,
particularly if your spouse is three, four,
or five years older than you,
and you are the primary insured,
because the spousal benefit is independent
from the primary insured's benefit in terms of the amount.
Meaning that if the primary insured filed early
and the spouse filed late,
the spousal benefit continues to grow up until age 67.
So, if the spouse is already age 67
and the primary insured is age 62,
then you have one social security payment at its maximum,
the spousal benefit, and you have the other,
the primary insured benefit, at its minimum.
So sometimes, looking at the couple holistically
makes a lot of sense.
The next point that is often made
is to take the funds at age 62 and invest them.
There seems to be an entire subculture around this point.
To be completely candid,
I'm not a big fan of taking the funds at age 62
and investing them except for one particular scenario,
and that's a very specific one
which we'll talk about in a minute.
But generally speaking, in order for this to work,
you have to assume a lot more risk
than waiting to take Social Security until later.
Let me explain.
First, understand that if you wait,
your Social Security payment goes up about 7% per year
for every year past age 62 that you wait
up until full retirement age.
Once you hit full retirement age,
66 or 67 depending on your age,
it goes up almost 8% a year to age 70.
After age 70, it doesn't increase any longer.
You should take it at age 70
because you're leaving money on the table past that point.
Plus everyone, those that claim social security at age 62
and those that deferred claiming social security,
both groups receive a cost of living adjustment
on their payment or their future payment.
The argument that's put forward
is that we all have about the same expiration date,
whether you take it now or you defer it.
So why not take more payments now and invest them,
rather than fewer payments later?
Here's why.
If you take your funds now,
you basically can't work a full-time job
because there's an earnings limit.
That earnings limit in 2023, for example, is $21,240.
For every $2 over the earnings limit,
you have to give $1 back.
By the way, I'm a huge Michael Jordan fan.
In 2023, the earnings limit was $21,240.
This is me wearing the number 23 Michael Jordan number.
Get it? 23, Jordan 2023.
You get the point.
If you are only allowed to earn $21,240
and you are average, the average retirement family
spends $52,000 in retirement roughly.
That differential is $31,000.
Well, where do you get that differential?
Well, a lot of people have to take it from their investments
so you're robbing Peter to pay Paul.
You're taking funds out of say, a 401K,
and paying taxes on that amount
only to reinvest the social security payment
to further grow your 401k or other, as the case may be.
Aside from losing the tax advantage of deferred growth,
you also are potentially creating additional risk
because depending on how you invest your money,
in order for you to catch up
from that big differential that you received
from those 7% increases, the 8% increases, plus COLA,
you needed to take more risk with your investments.
Many of us lost money in 2022.
Most people lost between 15 and 20%
if you were invested in a target based fund.
One based on your target retirement age.
If you were age 62 in 2022
and decided to defer your Social security payment by a year,
you would've picked up an additional 7%
plus the cost of living adjustment.
So a total of 15.7% on all payments going forward.
If instead you decided
to take your social security payment in 2022
and you invested it, you would've lost money
under most scenarios.
You still would've got
the cost of living adjustment of course,
but that would've been on a lower base.
Believe me, I actually geek out on this stuff,
and I built many Excel models on this particular question,
and it's very, very hard to outperform
the growth of social security
and the cost of living adjustment that gets built into it
because that is a certainty.
The only time it doesn't work
or it might not work outside of the fact
that you have a health condition
which is going to shorten your lifespan,
or you're trying to coordinate benefits with a spouse,
is if you have a defined benefit plan
and that payment is enough to cover all of your costs
so you don't have to sell investments
to actually fund a lifestyle.
And even if you hit it right
with the investment return,
you're talking about extending the break even point
by a few months, maybe even a year
if you do it in that very specific example
and it all works out.
For those of you interested in this particular point,
I have a video called,
"Should You Take Social Security at Age 62 and Invest,
or Wait until FRA for Retirement Age?"
I'll put a link in the description
so that you can check it at the end.
And one final warning, this was filmed
during November of 2021,
and I very unsuccessfully grew a beard
so you'll see someone who kind of looks like me
but you might not be sure.
Yes, that is actually me.
The next scenario for taking it at age 62
is paying off ultra high interest credit card
or consumer debt.
Let me explain.
One of the reasons taking Social security
at age 62 and investing doesn't necessarily work,
at least for most people,
is because you have a lot of unknowns,
a lot of risk that you don't have
under the social security scenario.
But if you have a riskless return,
then it changes the game significantly.
If you knew for sure, for example,
that you could get an 18 or 19% return on your investment,
well, in that scenario, it might actually work.
Unfortunately, there aren't a lot of investments
that guarantee an 18% return.
However, if you can guarantee the absence
of an 18% interest charge, it's the exact same thing,
but in reverse.
So if you have a credit card with a significant balance,
and I'm talking about significant.
I'm not talking about a few thousand dollars.
I'm talking about a lot of money.
So much that you actually are in a hole
and you can't get out.
In that particular scenario, it might make sense.
But, it probably isn't age 62 for most of you.
It might be age 64 instead of age 65,
or age 65 instead of age 66
because you're changing your payment
for the rest of your life. And if you take it at age 62,
there's a good chance, a very good chance,
that you have vastly overshot the mark
in terms of what you need.
But whether it's 62, 63, 64, 65,
it's an entirely personal decision,
but let me give you a couple of other options.
The first is a debt consolidation loan.
Taking all of your credit card debt,
if you have more than one credit card,
consolidating and having one payment
to one particular creditor.
The next is credit counseling.
Going in and having someone help you help yourself.
Understanding where your cash flow is,
what you're spending money on
that you shouldn't spend money on,
how to prioritize your payments, et cetera.
Now I've never really liked the idea
of borrowing from your 401k because I believe
that your 401k is your firewall to the world.
And so therefore, that should be an extreme.
But I also believe that taking social security early
to pay your credit card debt is an even bigger extreme.
So in that particular scenario,
it might make sense to borrow from your 401K,
and then pay yourself interest as you pay it back.
You have a lot more options than you think
when it comes to credit card debt and personal debt.
I'll put a link in the description
to the Federal Trade Commission's
consumer advocacy division.
That website has a lot of good information
that you can use to manage your debts,
and potentially not make the wrong choice
when it comes to this decision.
Finally, the last point is that you just need the funds.
Life has been hard.
You have come to the end of your options,
and you are faced with either taking social security,
or going into a big black financial hole
that you might not come out of.
By the way, needing the money now
and health related concerns
are the two big reasons that people cite
for taking Social Security at age 62.
The others are important as well,
but those two are reasonably hard to argue against
in very specific situations.
If this is you, this might actually make a lot of sense.
Getting yourself right financially
could actually mean the difference
between having bad health and good health,
particularly with something as simple as nutrition
and the food that you choose to eat
based on how much money you have to spend on groceries.
Especially now.
As I stated at the beginning of the video,
a lot of the data in this video
comes from the Congressional Research Service
Social Security Retirement Age report from July of 2022.
But, there's a lot more in there
than the age the people take Social Security.
It's data rich.
It's definitely worth a read.
It's about 25 or 30 pages so give yourself
an hour or so when you get it.
But as I said before,
there is a link in the description for you.
All you need to do is click it,
and you will be taken right to that page.
Also, in addition, there's a link
to the FTC consumer advocacy page that we talked about,
as well as a link to my video
should you take Social Security at age 62 and invest,
or wait until FRA.
This is Geoff Schmidt.
Thanks for watching.