Jan 24, 2023

A Different Way of Looking at Social Security

Many Financial Advisors and other professionals in the money management space seem to have settled on the question of when to claim Social Security benefits: Later is always better, and if one can wait until age 70, this is best. From a purely mathematical perspective, it is difficult to argue with this conclusion. I do find this analysis incomplete, however. Not all dollars are created equal.

For retirees below a certain threshold of wealth or for whom Social Security payments make up a large proportion of their retirement income, waiting until age 70 is likely the best choice. This allows for a higher degree of financial margin and will leave the surviving spouse with the highest available benefit. The best way to “wait” until age 70 without consuming a large portion of the other retirement assets is to work to as close to age 70 as is feasible. The math shows that in order to “win” by waiting, one must live past age 83. If longevity runs in the family, waiting until 70 makes even more sense.

For retirees above a certain level or wealth or for whom Social Security represents a small portion of their retirement income, the analysis changes. In his book “Just Keep Buying,” Nick Maggiulli cites a study from the Center for Retirement Research that examined the spending behavior of retired households over time and discovered retirement spending declined by 1% per year.

This finding disputes the common notion that spending will increase with inflation during retirement. Why might this be?

In his book “Die With Zero,” Bill Perkins discusses how our willingness and ability to spend money declines as we age. His central thesis is that not all dollars are created equal.

For anyone who has taken a finance course, the time value of money is a familiar concept. A dollar today is worth more than a dollar a year from now. How much more? It depends on what your dollar could earn in the intervening year. But this isn’t what Bill Perkins is getting at. His “value” of a dollar is more closely tied to another familiar term: utility. Perkins posits that as we age, the utility of our dollars will similarly decline. We get more utility from spending today on experiences than we would by spending money on those same experiences a year or ten years from now.

You will have to pardon my chicken scratch, but the chart above is a rough translation of a similar chart Perkins provides. If, as Nick Maggiulli cited, spending remains roughly flat during retirement for many retirees barring some financial disaster, their wealth will probably decline slightly. Then, as spending declines and compounding continues, their wealth is likely to increase toward the end of their life. This is if they follow a “typical” spending schedule. Notice the green and blue lines. While our utility from certain things will certainly not decline in lockstep with age, our utility in some things will. These are, critically, things we will never regain the capacity to participate in.


How does this relate to retirement and optimizing your Social Security benefits? For households who do not rely heavily on their Social Security payments, a good case can be made for claiming early. Why? Utility. Claiming at age 62 means a prospective retiree will have more spending money in their first decade of retirement than a person who claims at age 70. This is self-evident. What isn’t as well articulated in the financial press, however, are the often-dramatic differences in health, strength, endurance, and mobility between the average 65-year-old and the average 75-year-old. It isn’t hard to imagine how different a trip to Disneyland with the kids and grandkids would be at age 65 versus the same trip taken at age 75. At age 75 much of the utility would be lost due to a decline in health.

I am not saying all 75-year-olds are decrepit and incapable of taking trips that demand a high level of physical exertion. No. What I am saying is that a vital, healthy, athletic 75-year-old was, in nearly every instance, more so at age 65 and even more so at age 55. This health and vitality will directly contribute to the utility one would get from such a trip.

What does this mean? It means not all dollars are created equal because not all experiences are equally available or enjoyable as we age. Having more income beyond age 83 might be a necessity for some, but for those retirees where the extra income is not necessary, this income will have dramatically less utility at age 83 than at age 63. Even if it is a few hundred dollars more at age 83.

This does not mean all prospective retirees should claim their Social Security benefits early. That would be foolish and invite too much risk in some cases. It does mean the analysis you do with your advisor should extend beyond the simple dollars and cents and beyond the typical Social Security “optimization” framework. A prospective retiree needs to be honest about their long-term strength, balance, mobility, and endurance prospects as well as think critically about the kinds of experiences they wish to have. Because a huge part of the utility they will get from those experiences will rely on when they have them.

Running out of money is an unacceptable outcome for a retiree. The spending, investment, and Social Security or pensions decisions should be made with lowering this risk first. However, a less discussed unacceptable outcome for a retiree is leaving an estate several times larger than expected or necessary. It happens. The remedy for this risk is spending more. If you are going to spend more, spend when you are healthy enough to maximize the utility of those dollars.


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