What to consider when deciding when to begin taking Social Security

Take Social Security at age 62 or wait until full retirement age? Vanguard investing expert Michael DiJoseph discusses what investors should consider when deciding when to begin drawing on their Social Security. 

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Notes:
  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2016 The Vanguard Group, Inc. All rights reserved.


TRANSCRIPT

Gary Gamma: Vince in South Carolina, said, “Why doesn’t anyone address the time value of money when urging people to delay their Social Security to age 66?” And then he goes on to give an example: “If you start taking the money at 62 and invest it, you’ll come out ahead, assuming a reasonable rate of return of 4%–5%.” I guess that’s part of the answer—not necessarily the easiest return if the markets are flat.

Michael DiJoseph:
Right, interesting. So Social Security: It’s a question we get all the time; I’m sure you get it all the time and, arguably, one of the most important decisions that someone’s going to make in your retirement. So I’m a math guy; let’s take a look at the math. So most people have a full retirement age, meaning when your Social Security benefit is at, we’ll call it 100%, right, your standard benefit. And it’s either 66, 67, or somewhere in between. If you take it before the full retirement age, it gets reduced by a half of a percent per month, all the way down. So if you’re 62 and your full retirement age is 67, your distribution is actually reduced, or your benefit is reduced down to 70% of the full amount. Now, interestingly, after full retirement age, it actually goes up two-thirds of a percent every single month, up until age 70, at which point you can have as high as—so if your full retirement age is 67, you could have a benefit of 124% of your original, kind of the base benefit, at full retirement age. If it’s 66, it can be as high as 132%. So, you know, doing the math there, that’s 8% per year guaranteed from the government. Now it doesn’t compound, but even with that it’s 7% and change. So, I would say that may make sense, but you have to take into account that you’re actually getting a reduced benefit. Not only that, you’ll pay taxes on it, you’ll have to reinvest it. Then you’ll get paid taxes again, and you really just don’t know what the markets are going to do. It may sound like 4% or 5% is a reasonable return, but one or two poor returns in any given year in there could really kind of torpedo that strategy. So I would say take the 8% guaranteed, to the extent that you can, but not everyone can wait until their full retirement age or age 70. But given that strategy, I would probably say to wait and take advantage of the guaranteed return.

Important information All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation. © 2016 The Vanguard Group, Inc. All rights reserved.